|[August 19, 2013]
Fitch Affirms Universal Health's Ratings at 'BB'; Revises Outlook to Positive
NEW YORK --(Business Wire)--
Fitch Ratings has affirmed the ratings of Universal Health Services,
Inc. (UHS), including the Issuer Default Ratings (IDR) at 'BB'. The
Rating Outlook has been revised to Positive from Stable. A full list of
rating actions follows at the end of this release.
KEY RATING DRIVERS
-- The Positive Rating Outlook reflects credit metrics that are strong
for the 'BB' rating category, driven by a demonstrated commitment to
debt repayment but offset by prolonged weak operating trends in the
acute care segment. Recent volume and payor mix figures hint at a
possible inflection point, and further evidence of durable improvement
could support an upgrade in the near to medium term.
-- Credit metrics continue to strengthen since the Psychiatric
Solutions, Inc. (PSI) deal in 2010. Debt leverage has moderated to 2.6x
at June 30, 2013 compared to 3.6x (pro forma) at Dec. 31, 2010. Fitch
expects UHS to operate with debt leverage (total debt/EBITDA) between
2.5 times (x) and 3.0x, using additional free cash flow for debt
repayment in the remainder of 2013.
-- Acute care pressures have been offset by the more profitable and
stable revenue stream of UHS's behavioral health business. Overall cash
flows have remained strong and growing as a result. Fitch forecasts free
cash flow (FCF) between $400 million and $500 million in both 2013 and
-- UHS and its fellow hospital operators will benefit from higher
margins and possibly increased volumes due to the Affordable Care Act
(ACA), starting in 2014. Over time, constrained reimbursement growth,
especially from government payors, could erode some of the expected
Maintenance of a 'BB' IDR will require debt leverage generally
maintained below 3.75x with strong and steady annual FCF of at least
$300 million. Debt leverage of 2.6x at June 30, 2013 and latest 12
months (LTM) FCF in excess of $370 million provides UHS with significant
flexibility at its current ratings. UHS also maintains ample cushion
under its credit facility leverage covenant, which steps down to 3.75x
at Dec. 31, 2013.
An upgrade to 'BB+' will require further evidence of durably improving
acute care volumes and payor mix in UHS's core markets, accompanied by
steady and robust cash flows. Given 2013 year-to-date results and
Fitch's expectation for the remainder of the year, an upgrade is likely
in the next 2-4 quarters. Fitch believes UHS is currently operating with
credit metrics, including debt leverage, indicative of a 'BB+' IDR.
A negative rating action is anticipated only in the event of a sizeable
leveraging M&A or capital deployment transaction, or other unforeseen
significant event, leading to sustained debt leverage at or above 3.75x
and/or severely depressed cash generation. Over the ratings horizon,
Fitch does not foresee operational pressure sufficient to cause a
downgrade to 'BB-'.
CREDIT METRICS STRONG FOR RATING CATEGORY
Credit metrics continue to improve subsequent to the 2010 acquisition of
PSI. Debt leverage has moderated to 2.6x at June 30, 2013, compared to
3.6x on a pro forma basis at Dec. 31, 2010. EBITDA growth and about $400
million of debt repayment has driven this deleveraging. Fitch expects
UHS to operate with debt leverage below 3.0x over the ratings horizon.
Fitch thinks UHS will continue to deploy capital in-line with a 'BB'
category credit profile. Fitch expects the trend of rapid consolidation
and integration among healthcare providers to continue with the goal of
driving efficiencies and improved bargaining power through increased
scale and scope of services. UHS has been less aggressive than its peers
in this respect, consummating only one material acquisition since the
transformative PSI deal in 2010 (Ascend Healthcare Corp.). Fitch sees
limited opportunities for large-scale acquisition activity in UHS's core
businesses over the ratings horizon.
POSSIBLE INFLECTION POINT FOR PRESSURED ACUTE CARE BUSINESS; IMPROVEMENT
LIKELY TO BE SLOW
Acute care inpatient hospital volumes and revenue mix have been
considerably pressured industry-wide for the past few years. Volume
growth is integral to maintaining profitability for hospital operators,
given their high fixed cost structures. For UHS, the second quarter of
2013 (2Q'13) may imply an inflection point. Same-hospital (SH) acute
care admissions growth of 1.6% represents the highest growth rate and
only the second quarter of positive growth in the past 12 quarters. SH
adjusted admissions growth was 2% in the quarter. A sustained return to
growth may be supported by steadily improving macroeconomic indicators,
such as unemployment rate, in a couple of UHS's largest markets.
Hospital operations tend to lag the broader macro-economy; so Fitch
thinks it is likely that UHS's acute care admissions and payor mix will
continue to improve.
Still, Fitch expects any improvement in volumes or payor mix to be slow.
The overarching trend of weak ealthcare utilization and treatment delay
will likely persist well into 2014, given still relatively elevated
levels of unemployment and the growing prevalence of high-deductible
health insurance plans, combined with the challenges of implementation
and public education with respect to the ACA's coverage expansion
Furthermore, Fitch anticipates the continued shift of care to less
expensive, often outpatient settings and increasing coverage of
preventative care to moderate acute care admissions growth over the
medium to longer term. Hospital operators that are successful in
developing robust outpatient and primary care service offerings stand to
benefit from both shifted and new volumes. UHS has generally been less
aggressive than most of its peers in this area.
CASH FLOWS, GROWTH SUPPORTED BY BEHAVIORAL HEALTH OPERATIONS
BH revenues accounted for about half of UHS's revenues in 2012 compared
to ~25% in 2009. Though causing a material increase in debt leverage,
the PSI acquisition materially increased UHS's exposure to the more
profitable and stable BH industry, helping to moderate the negative
impact of UHS's strained acute care business. Overall cash flows have
remained strong and growing as a result. Fitch forecasts FCF of
approximately $400 million-$500 million in 2013 and 2014.
Fitch believes UHS's current mix of acute and behavioral care is
beneficial to the company's credit profile and strategic outlook. UHS is
the largest privately-owned facilities-based behavioral health operator
in the U.S., controlling approximately 15%-20% of the otherwise very
fragmented BH industry.
ACA IMPACT IS NET (News - Alert) POSITIVE, BUT MAGNITUDE AND SUSTAINABILITY STILL
Fitch expects UHS and its peers to benefit from a somewhat gradual,
one-time increase in acute care volumes and margins due to the
Affordable Care Act's (ACA) coverage expansion implementation in
2014-2015. The primary effect as it pertains to UHS will be a decrease
in uncompensated care beginning in 2014, thereby increasing net revenues
on a relatively constant cost structure. Most of this benefit will be
realized over the course of 2014-2015; but its magnitude is dependent on
several still unresolved factors: namely, enrollment in the healthcare
insurance exchanges, states' decisions with regard to Medicaid
expansion, and the uptick in healthcare utilization by the newly insured.
About half of UHS's acute care beds are in states which will not be
expanding their Medicaid programs in 2014, thereby moderating the
near-term positive effects of the ACA. In those states, Fitch expects
only a moderate uptick in covered lives due to the individual mandate.
Fitch forecasts UHS's acute care profit margins to expand by
approximately 170 basis points (bps) from 2013 to 2015. This forecast
could prove conservative, especially if additional states (e.g. Florida)
do choose to expand their Medicaid programs at a later date. Some of
this margin gain could begin to erode in later years, however, due to
mandated decreases in Medicare reimbursement, the ongoing push to
moderate healthcare spending, and a general shift away from volume-based
payments to value-based pricing arrangements.
LIQUIDITY AND DEBT MATURITIES
UHS has adequate liquidity, comprising $12.6 million of cash on hand,
$769 million available on its $800 million secured revolver ($777
million due August 2016; $23 million due November 2015), and $15 million
available on its $275 million accounts receivable facility (due October
2013) as of June 30, 2013. UHS has not historically carried large cash
balances but has instead relied on its revolver and securitization
facility for short-term financing.
Debt maturities are manageable for the next few years and are estimated
as follows: $296 million for the remainder of 2013; $74 million in 2014;
$106 million in 2015; $2.8 billion in 2016; and $270 million thereafter.
Fitch has affirmed UHS's ratings as follows:
-- IDR at 'BB';
-- Senior secured bank facility ratings at 'BB+';
-- Senior secured notes ratings at 'BB+'; and
-- Senior unsecured notes ratings at 'BB-'.
The Rating Outlook has been revised to Positive from Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
-- 'Corporate Rating Methodology: Including Short-Term Ratings and
Parent and Subsidiary Linkage' (August 2013);
-- 'Hospitals Credit Diagnosis: Weak Volume Trend Possible Evidence of
Systemic Shift in Care Delivery' (April 2013);
-- 'The Affordable Care Act and Healthcare Providers: Assessing the
Potential Impact' (May 2013);
-- 'High-Yield Healthcare Checkup' (January 2013);
-- '2013 Outlook: U.S. Healthcare' (November 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape)
The Affordable Care Act and Healthcare Providers (Assessing the
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S.
2013 Outlook: U.S. Healthcare -- Navigating a Dynamic Operating and
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND
DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING
THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS.
AVAILABLE ON (News - Alert) 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
[ Back To Technology News's Homepage ]