Fitch Rates Universal Health Services' $600MM Bond Offering 'BBB-'

Tue Jul 29, 2014 12:07pm EDT

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(The following statement was released by the rating agency) CHICAGO, July 29 (Fitch) Fitch Ratings has assigned a 'BBB-' rating to the $600 million of senior secured bonds issued by Universal Health Services, Inc. (NYSE: UHS), consisting of $300 million due 2019 and $300 million due 2022. The proceeds are expected to be used to refinance existing indebtedness. Assuming substantially all the debt proceeds are used for refinancing, Fitch views the transaction as favorable to UHS's credit profile, since it will refinance a portion of debt due in the 2015-2016 timeframe. At March 31, 2014, 2016 maturities represented 86% of total debt outstanding. Subsequent to this transaction, this figure could fall to below 70%. UHS has good flexibility at its current 'BB+' rating in the event that not all the proceeds from this issuance are used for refinancing existing debt. UHS's Issuer Default Rating (IDR) is currently 'BB+'. The Rating Outlook is Stable. A full list of UHS's ratings follows at the end of this release. KEY RATING DRIVERS -- UHS has continued to demonstrate a commitment to debt repayment, resulting in debt-to-EBITDA of 2.3x at March 31, 2014 compared to 4.9x (reported) at Dec. 31, 2010. Fitch expects UHS to operate with debt leverage of 2.25x-3x over the ratings horizon. -- Unlike many of its peers, UHS has not engaged in large-scale acquisitions since its $3.1 billion purchase of PSI in 2010. Fitch expects UHS to pursue moderately-sized, targeted acquisitions over the ratings horizon. The 'BB+' rating provides ample flexibility for UHS to incur additional debt in order to participate in the ongoing consolidation of the U.S. healthcare provider space. -- Cash flows are strengthening on a stabilizing acute care business, better margins due to lower uncompensated care, and growing behavioral health operations. Fitch anticipates that UHS will generate solid free cash flow (FCF) of $550 million-$700 million in 2014-2015, compared to $477 million for the latest 12 month (LTM) period ended March 31, 2014. -- UHS's behavioral health business accounts for more than half of its overall revenues, providing business and revenue diversification as well as improved financial stability and profitability. Good organic growth in the mid-single digits, driven by mental health parity rules and UHS's capacity growth initiatives, and moderate margin improvement are expected over the ratings horizon. -- UHS's same-hospital admissions were flat in 2013, better than the 2% and 2.2% declines in 2012 and 2011, respectively, and stronger than many of its for-profit peers. Fitch expects moderately negative to possibly flat acute care inpatient admissions growth to be indicative of stable markets for the foreseeable future. Pricing metrics continue to remain stable as lingering unfavorable payor mix has been offset by relatively strong commercial reimbursement rate increases. -- Fitch views the Affordable Care Act (ACA) as a net positive for UHS and its hospital operator peers. Net revenue growth from declining uncompensated care, on a fairly constant cost base, will drive an increase in absolute profits during 2014-2015. Fitch believes it is likely, however, that profit gains will begin to erode in later years due to an overall constrained healthcare reimbursement environment. RATING SENSITIVITIES Maintenance of a 'BB+' IDR will require a continued demonstrated commitment to operating with debt leverage below 3x, with FCF-to-adjusted debt of 8% or higher. Fitch notes that UHS has good flexibility at the current 'BB+' level to consummate debt-funded M&A, especially as it supports longer-term growth in light of prevailing trends in healthcare (i.e. integrated care delivery, physician employment, outpatient service line expansion, etc.). A downgrade of UHS's IDR to 'BB' could result from pressured margins and cash flows - or a large, leveraging transaction - that results in debt leverage expected to be sustained above 3x and/or FCF-to-gross adjusted debt below 8%. Margin and cash flow pressures of this magnitude are not likely to occur abruptly, but could materialize due to severe pricing pressures or unfavorable large-scale reform of Medicare and/or Medicaid programs. Also, the availability of single M&A transactions that could drive a downgrade is limited. An upgrade of UHS's IDR to 'BBB-' is unlikely in the near- to intermediate-term, as Fitch views the risks around reimbursement and other regulatory factors associated with healthcare providers in the U.S. - and UHS's reliance on government payers - as material going forward. Furthermore, UHS's current ratings and credit metrics provide the firm with flexibility to participate in the consolidation of the healthcare provider space, which Fitch expects to continue through the intermediate term. MOST DEBT MATURES IN 2016, LIQUIDITY IS AMPLE Available liquidity is sufficient. Though UHS does not usually carry large amounts of cash ($16 million at March 31, 2014), it maintains an $800 million revolver, of which $743 million was available at March 31, 2014. UHS also maintains a $275 million A/R facility, of which $115 million was available at March 31, 2014. Debt maturities are manageable for the firm, though the bulk of the outstanding term loans are due in August 2016 (2016 maturities represent 86% of total debt). Fitch expects UHS will have adequate access to capital as it seeks to refinance its credit facilities in advance of this date. Estimated debt maturities at March 31, 2014 are as follows: remainder of 2014: $56 million; 2015: $123 million; 2016: $2.77 billion; 2018: $250 million. NOTCHING SCHEME The secured debt rating is one notch above the IDR, illustrating Fitch's expectation for superior recovery prospects in the event of default. Furthermore, Fitch believes UHS has good financial flexibility at the 'BB+' IDR, supporting the one-notch differential. The unsecured notes are rated one notch below the IDR to reflect the substantial amount of secured debt to which they are subordinated. More than 90% of UHS's outstanding debt at March 31, 2014 was secured, reducing the potential recoveries for unsecured creditors. Fitch rates UHS as follows: -- IDR 'BB+'; -- Senior secured bank facility 'BBB-'; -- Senior secured bonds 'BBB-'; -- Senior unsecured bonds 'BB'. The Rating Outlook is Stable. Contact: Primary Analyst Jacob Bostwick, CPA Director +1-312-368-3169 Fitch Ratings, Inc. 70 W Madison Street Chicago, IL 60602 Secondary Analyst Megan Neuburger Senior Director +1-212-908-0501 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: brian.bertsch@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'U.S. Healthcare Stats Quarterly (First-Quarter 2014)' (July 7, 2014); --'Hospitals Credit Diagnosis' (June 30, 2014); --'High-Yield Healthcare Checkup' (April 4, 2014); --'2014 Outlook: U.S. Healthcare' (Nov. 25, 2013). --'For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (Oct. 24, 2013); --'Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers)' (Oct. 1, 2013); --'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (May 1, 2013); --'Corporate Rating Methodology' (May 28, 2014). Applicable Criteria and Related Research: Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact) here Margin Preservation Strategies — Different Angles (Credit Implications for U.S. Hospitals and Health Insurers) here High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies here U.S. Healthcare Stats Quarterly (First-Quarter 2014) here Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape) here For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices here 2014 Outlook: U.S. Healthcare — Secular Challenges Require a Compelling Value Propositihere Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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