NEW YORK (
) -- Investors in
have more reasons to flee the stock besides Monday's
New York Times
that cardiologists at the private-equity-backed hospital chain may have performed hundreds of unnecessary heart procedures.
After its $4 billion initial public offering, the largest in the U.S. in 2011, HCA is still being run as if it were a private equity investment with much of the spoils going to insiders at the peril of ordinary investors.
The stunning reports of improper medical decisions raised serious questions about the company, causing the shares to gyrate. In second-quarter earnings released Monday, HCA disclosed that the U.S. attorney's office in Miami is looking into cardiology practices at 10 of its hospitals.
Reactions to the report even tied HCA's alleged cardiology practices to an acrimonious battle over presumptive Republican presidential candidate Mitt Romney's years running private equity firm
, a co-owner of HCA prior to its 2011 IPO.
But even before Monday's revelations, serious risks existed around HCA, its management and financial health.
For example, HCA carries a staggering $27 billion debt load, a remnant from its 2006 buyout by Bain and
. That gives the company a shareholder equity deficit of roughly $7 billion, the third most of any U.S. company following bankrupt
Clear Channel Outdoor's
CC Media Holdings
, according to data compiled by
After HCA's March 2011 IPO, Bain and KKR remain minority investors in the company, holding near 20% stakes, respectively. However, their sway appears to be controlling.
Instead of paring its titanic debt load using an impressive profit of nearly $2.5 billion -- and an even more notable $4 billion in free cash flow earned in 2011 -- management appears happy to maintain debts hovering near $30 billion. The debt mostly comes due between 2019 and 2022, after its former private equity owners used spongy markets to refinance tens of billions in buyout debt.
In fact, in order to pay a special $2 a share dividend this February, HCA took on more debt, issuing $1.35 billion in junk-rated bonds to finance the payment to shareholders, including its former private equity owners.
The question is whether the practice -- a private equity industry standard called a "dividend recapitalization" -- is suitable for ordinary stockholders now that HCA is a U.S.-listed company with a market cap nearing $12 billion. Those questions are only accentuated by HCA's debt load, leverage ratios, shareholder equity deficit and junk bond ratings.
In maintaining a sub-investment grade B+ rating on HCA's billions in newly issued and outstanding debt, ratings agency
Standard & Poor's
notes the company's private-equity-like dividend practices as a key risk.
"Because HCA has an extensive history of large shareholder distributions as a public company, we believe dividends to its equity partners and shareholders may take precedence over sustainable debt reduction, keeping it highly leveraged," S&P credit analyst David Peknay wrote in a November 2011 ratings opinion.
In 2010, the calendar year prior to HCA's IPO, Bain and KKR paid themselves total dividends in excess of $4 billion, nearly matching their initial combined equity investment of $5.5 billion. That practice of plowing cash flow and earnings back to investors instead of balance sheet repair from the debt-laden 2006 buyout appears to be a key to HCA's financial management, even as it becomes majority-owned by U.S. stock investors.
Because the bulk of HCA's debts come due at the end of the decade and the company generates industry-leading cash flow and profit, analysts don't appear worried about what would normally be considered an outrageous debt. No analysts covering HCA give it a "sell" rating. Meanwhile, they hold 20 "buy" recommendations and four "holds," according to
In the aftermath of Monday's
New York Times
report, some covering the stock expect allegations of abusive cardiology practices and aggressive revenue policies to eventually blow over. In fact, they point to second-order risks that are seemingly unrelated to the
allegations, HCA's management practices, or the issue of medical fraud.
"Media scrutiny will likely also highlight Bain Capital's relationship to HCA given how critical the Obama campaign has been of Romney and his work at Bain Capital," wrote Jefferies analyst Arthur Henderson in an Aug 6 report that maintained HCA's "buy" rating, but cut its price target nearly 12% to $30. "Expect anxieties to run high this week, but we think they will abate shortly, sooner rather than later," added Henderson, who noted that the reports, and a prospective DoJ inquiry clouded HCA's strong second-quarter earnings, in an assessment that mirrored consensus.
Whatever the outcome of HCA's cardiology practices, it's resoundingly clear that the company's titanic debt stock shouldn't be expected to "abate" any time soon.
That's where investors should pay attention.
-- Written by Antoine Gara in New York