Sept 24 - Fitch Ratings has assigned a 'BB+' rating to Universal Health
Service, Inc.'s (UHS) new $900 million term loan A-2 due August 2016.
Fitch does not expect the incremental term loan to materially affect
credit metrics over the ratings horizon. Absolute debt levels remain relatively
unchanged. A full list of ratings is provided below.
The new term loan was issued in connection with an amendment to the company's
credit agreement originally signed in November 2010. The amendment also extends
the maturity date of the majority of the revolver and the existing term loan A
to August 2016 from November 2015. The proceeds of the new term loan were used
to repay a portion of the amounts outstanding under the company's term loan B
due November 2016 and revolver.
Fitch currently rates UHS as follows:
--Issuer Default Rating (IDR) 'BB';
--Senior secured bank facility 'BB+';
--Senior secured notes 'BB+';
--Senior unsecured notes 'BB-'.
The Rating Outlook is Stable. The ratings apply to approximately $3.5 billion of
debt at June 30, 2012.
KEY RATING ISSUES
--Credit metrics have improved significantly since the November 2010 Psychiatric
Solutions, Inc. (PSI) acquisition. Fitch expects debt leverage (total
debt/EBITDA) to be sustained below 3.4x over the ratings horizon.
--Cash flows remain strong and liquidity is adequate. Free cash flow (FCF; cash
from operations less capital expenditures and dividends) in the range of $350 -
$450 million is expected in fiscal 2012 and 2013.
--Acute care volumes and pricing are under extreme pressure due to persistently
high unemployment, particularly in UHS' largest markets. Fitch expects UHS'
acute care operations to remain particularly stressed through 2012 and into
--Higher profitability and a more stable revenue stream from UHS' behavioral
health business have moderated the overall effects of the strained acute care
business. Fitch forecasts stable organic growth and modestly improving
profitability for the behavioral health business over the ratings horizon.
--Much uncertainty remains regarding healthcare reform legislation, as well as
both federal and state budget debates. Governmental reimbursement is likely to
continue to moderate no matter the outcome of these disputes.
GUIDELINES FOR FUTURE RATINGS ACTIONS
Maintenance of a 'BB' IDR will require debt leverage generally maintained below
3.75x with strong and steady annual FCF in the range of $300 - $400 million.
Fitch expects UHS' ratings to lag improvements in credit metrics in the
intermediate-term due to the company's demonstrated willingness in 2010 to
transform its credit profile for an acquisition. Furthermore, very weak acute
care volume and pricing trends, which Fitch expects to persist through 2012 and
into 2013, may weigh on positive ratings momentum.
A positive rating action is not anticipated in the near term; although one may
be contemplated if Fitch expects debt leverage to be maintained below 2.5x.
Steady and robust cash flows accompanied by improved acute care volume and
pricing metrics would also be expected to support an upgrade to 'BB+'.
A negative rating action is anticipated only in the event of a sizeable
leveraging M&A or capital deployment transaction resulting in debt leverage
sustained at or above 3.75x. Despite the current pressures faced by the acute
care business, Fitch does not expect volumes or pricing to deteriorate to such a
degree that would precipitate a negative rating action in the near to
MUCH IMPROVED CREDIT METRICS
Credit metrics have improved significantly since the time of the Psychiatric
Solutions, Inc. (PSI) acquisition in November 2010. Fitch-calculated debt
leverage (total debt/EBITDA) at June 30, 2012 was 2.85 times (x) compared to
3.6x on a pro forma basis following the acquisition. Fitch expects that debt
leverage could increase to approximately 3.2x at Dec. 31, 2012 due to the
pending acquisition of Ascend Health Corporation.
Fitch expects UHS to operate with debt leverage between 2.8x and 3.4x over the
ratings horizon. As a result, an ample cushion is expected to be maintained
under its credit agreement's financial covenants. The debt leverage covenant
steps down to 4.5x at Dec. 31, 2012 and 3.75x at Dec. 31, 2013.
STRONG CASH FLOWS, ADEQUATE LIQUIDITY
Cash flows remain strong, despite very pressured acute care operations.
Latest-12-month (LTM) FCF as of June 30, 2012 was approximately $310 million.
Fitch anticipates that UHS will produce robust FCF in the range of $350 - $450
million over the ratings horizon. Forecasted cash flows are sufficient to cover
capital spending requirements, which include costs incurred to implement
electronic health records systems, and UHS' modest dividend.
UHS' liquidity profile is solid. At June 30, 2012, UHS had $33 million of cash
and equivalents and $623 million of unused capacity under its secured revolver
due 2015. The company also maintains a $275 million accounts receivable
securitization facility, of which $45 million was available at June 30, 2012.
Debt maturities are modest over the next three years, and Fitch believes UHS has
the market access necessary to address term loan maturities as they approach in
2015 and 2016. Fitch estimates UHS' debt maturities as follows: $301.5 million
in 2013; $73 million in 2014; $1 billion in 2014; $1.8 billion in 2016; and
$274.4 million thereafter.
HISTORICALLY STRONG ACUTE CARE OPERATIONS UNDER SEVERE STRESS
UHS' historically strong acute care operations are under severe pressure due to
high unemployment and other macroeconomic forces. Same-hospital (SH) admissions
have declined for eight consecutive quarters, mostly in-line with the broader
industry. Unlike most urban markets, which have begun to show volume
stabilization, UHS markets continue to produce SH admissions declines in excess
of 2%. SH admissions decline in second-quarter 2012 was 4.3%. The average SH
admissions decline for all Fitch-rated hospital operators was approximately 2.4%
in the quarter.
Pricing metrics have been exceptionally poor as well. Unfavorable payor mix
shifts continue to plague UHS' largest markets and are now washing out the
benefits of strong commercial pricing reported in the first half of 2011. SH net
revenues declined 2.2% in second-quarter 2012. Hospital volumes and payor mix
shifts typically lag broader macroeconomic developments by approximately three
or four quarters. Consequently, Fitch anticipates weak acute care results for
the rest of 2012 and possibly until the coverage expansion provisions of the ACA
take effect in 2014.
BEHAVIORAL HEALTH BUSINESS PROVIDES DIVERSIFICATION, STABILITY
UHS' behavioral health business more than doubled in size subsequent to the
acquisition of PSI in 2010. Although the acquisition resulted in a credit
profile transforming debt increase, it affords UHS with increased business and
revenue diversification, as well as improved financial stability and
profitability. Good organic growth in the mid-single digits and moderately
improving profit margins are expected over the ratings horizon for UHS'
behavioral health business. The proposed acquisition of Ascend is in-line with
Fitch's expectations for M&A and should contribute to incremental margin support
in the near and intermediate term.
HEALTHCARE REFORM NET POSITIVE, BUT STILL VERY UNCERTAIN
Despite the Supreme Court's ruling on the Patient Protection and Affordable Care
Act (ACA) in May, there remains much uncertainty surrounding the ultimate
outcome of healthcare reform. Fitch views the ACA as a net positive for UHS and
its hospital operator peers. Beginning in 2014, Fitch expects the drop in
uncompensated care to contribute to an increase in absolute profit dollars.
However, the magnitude of such an increase is dependent upon many factors. Two
of these factors are the proportion of the newly insured covered under Medicaid
versus the new insurance exchanges, and the level of reimbursement hospitals
will receive from insurance plans in the exchanges. Fitch anticipates that any
increase in profit dollars in 2014-2015 will nevertheless erode in the years
that follow due to increasingly constrained reimbursement.