HCA Holdings 2011 Annual Report Download - page 86

HCA HOLDINGS, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS — (Continued)
Market Risk
We are exposed to market risk related to changes in market values of securities. The investments in debt and
equity securities of our wholly-owned insurance subsidiaries were $621 million and $7 million, respectively, at
December 31, 2011. These investments are carried at fair value, with changes in unrealized gains and losses
being recorded as adjustments to other comprehensive income. At December 31, 2011, we had a net unrealized
gain of $11 million on the insurance subsidiaries’ investment securities.
We are exposed to market risk related to market illiquidity. Investments in debt and equity securities of our
wholly-owned insurance subsidiaries could be impaired by the inability to access the capital markets. Should the
wholly-owned insurance subsidiaries require significant amounts of cash in excess of normal cash requirements to pay
claims and other expenses on short notice, we may have difficulty selling these investments in a timely manner or be
forced to sell them at a price less than what we might otherwise have been able to in a normal market environment. At
December 31, 2011, our wholly-owned insurance subsidiaries had invested $131 million ($139 million par value) in
tax-exempt student loan auction rate securities that continue to experience market illiquidity. It is uncertain if auction-
related market liquidity will resume for these securities. We may be required to recognize other-than-temporary
impairments on these long-term investments in future periods should issuers default on interest payments or should the
fair market valuations of the securities deteriorate due to ratings downgrades or other issue specific factors.
We are also exposed to market risk related to changes in interest rates, and we periodically enter into
interest rate swap agreements to manage our exposure to these fluctuations. Our interest rate swap agreements
involve the exchange of fixed and variable rate interest payments between two parties, based on common
notional principal amounts and maturity dates. The notional amounts of the swap agreements represent balances
used to calculate the exchange of cash flows and are not our assets or liabilities. Our credit risk related to these
agreements is considered low because the swap agreements are with creditworthy financial institutions. The
interest payments under these agreements are settled on a net basis. These derivatives have been recognized in
the financial statements at their respective fair values. Changes in the fair value of these derivatives, which are
designated as cash flow hedges, are included in other comprehensive income, and changes in the fair value of
derivatives which have not been designated as hedges are recorded in operations.
With respect to our interest-bearing liabilities, approximately $5.082 billion of long-term debt at
December 31, 2011 was subject to variable rates of interest, while the remaining balance in long-term debt of
$21.970 billion at December 31, 2011 was subject to fixed rates of interest. Both the general level of interest
rates and, for the senior secured credit facilities, our leverage affect our variable interest rates. Our variable debt
is comprised primarily of amounts outstanding under the senior secured credit facilities. Borrowings under the
senior secured credit facilities bear interest at a rate equal to an applicable margin plus, at our option, either (a) a
base rate determined by reference to the higher of (1) the federal funds rate plus 0.50% and (2) the prime rate of
Bank of America or (b) a LIBOR rate for the currency of such borrowing for the relevant interest period. The
applicable margin for borrowings under the senior secured credit facilities may fluctuate according to a leverage
ratio. The average effective interest rate for our long-term debt declined from 7.8% for 2010 to 7.7% for 2011.
On November 8, 2010, an amended and restated joinder agreement was entered into with respect to the cash
flow credit facility to establish a new replacement revolving credit series, which will mature on November 17, 2015.
On May 4, 2011, we completed amendments to our senior secured credit agreement and senior secured
asset-based revolving credit agreement, as well as extensions of certain of our term loans. The amendments
extend $594 million of our term loan A facility with a final maturity of November 2012 to a final maturity of
May 2016 and $2.373 billion of our term loan A and term loan B-1 facilities with final maturities of November
2012 and November 2013, respectively, to a final maturity of May 2018.
83