HCA's 100-year bond issue in 1995 was equal parts bold statement and good finance, according to those involved in the issue.
Issuing century bonds was a way to plant the flag of Columbia/HCA Healthcare Corp. on the national landscape, said Steve Braun, who was general counsel for the company when the bonds were sold. In its form at the time, the company was relatively new, having completed the Columbia-HCA merger just 18 months before the bonds were sold and moved the company headquarters to Nashville earlier that year.
The century bonds "showed a permanence," said Braun, now a healthcare lawyer with the Nashville firm Boult, Cummings, Conners & Berry. "It was an opportunity to show that Columbia/HCA intended to be around for a long time. Issuing 100-year bonds kind of exemplified that."
The bonds didn't make much of an impression among Nashville's hospital entrepreneurs, Braun said. "I think it made more of a splash on Wall Street. And at that point, there weren't that many publicly traded companies in Nashville, largely because Columbia/HCA had acquired some of them," Braun said.
David Anderson, senior vice president and treasurer of HCA, helped make the decision to issue the bonds. "Back in 1995, the company had an A credit rating from both" Standard & Poor's and Moody's Investors Service, Anderson said.
"We would periodically issue debt in the public market. At that point in time, I was looking at doing something a little longer and was working with (the investment bank) Morgan Stanley. I was talking about doing a 30-year bond, and then I kind of pressed the guy at Morgan Stanley: Could we do a 100-year bond and what sort of (interest) premium would we pay?" For just 50 basis points, or half a percentage point, above the 7% rate at which it could have sold 30-year bonds, Columbia/HCA was able to issue the century bonds instead, Anderson said.
The $200 million bond transaction was and is quite a small drop in the bucket, Anderson added, as HCA has $9.3 billion in debt outstanding.
The move got Columbia/HCA what one healthcare stock analyst calls nearly "permanent financing," just a month before the U.S. Treasury Department began advocating tax law changes that would eliminate the tax deductibility of interest payments on corporate bonds issued for more than 40 years. Those changes were never enacted, but companies lost their appetite for issuing them amid a global debt crisis that arose in the late 1990s.
"The standard story is that there had been a relative decline in long-term interest rates, and some of these larger firms with reasonably good credit ratings wanted to lock in what was viewed as a reasonable rate," said Scott Harrington, a professor at the Wharton School of the University of Pennsylvania. The ability to issue century bonds conveys a favorable impression about a company, Harrington said. "If you're finding people to commit money over that long of a horizon, it suggests some confidence in the company, in the longevity of it," he said.
Even though interest rates continued to fall to historic lows after 1995, the bonds were good strategy for the company, said Premila Peters, a high-yield debt analyst with KDP Investment Advisors. Since the company had a strong investment-grade rating, Columbia/HCA was able to lock in a low interest rate without onerous conditions, or covenants, that could have limited HCA's strategic options, Peters said. That's something the company couldn't do today since its credit rating is BB, or one notch below the lowest investment grade rating of BBB, Peters said. Columbia/HCA was an A-rated credit when it issued the century bonds.
"I think it's the investor who's kind of taking a chance that interest rates won't go up or that the credit profile won't change," Peters said. "In 1997, when everything blew up, those guys (bondholders) probably took it on the chin. Those bonds are yielding about 8%, which means they are worth below par right now." It could be even worse for investors, Peters said. "What's helped this bond is what's going on with interest rates," she said. "Their credit quality has decreased, but interest rates have dropped, too. When interest rates go down, bond prices go up. The interest change has offset the decline in HCA's credit quality."
Joseph Chiarelli, an analyst who has covered healthcare companies for 15 years, agreed. "If you look at it from a financial standpoint, it makes a tremendous amount of sense. It's essentially equity. It's almost like permanent financing," said Chiarelli, who worked as an analyst for J.P. Morgan and, until recently, Oppenheimer. "It was a very attractive transaction that was well-received."