-- Issuer Default Rating (IDR) to 'BB+' from 'BB';
-- Senior secured bank facility rating to 'BBB-' from 'BB+';
-- Senior secured notes rating to 'BBB-' from 'BB+';
-- Senior unsecured notes rating to 'BB' from 'BB-'.
The Rating Outlook has been revised to Stable from Positive.
The ratings apply to approximately
KEY RATING DRIVERS
-- UHS has continued to demonstrate a commitment to debt repayment, resulting in debt-to-EBITDA of 2.3x at
-- Unlike many of its peers, UHS has not engaged in large-scale acquisitions since its
-- 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
-- UHS behavioral health business accounts for more than half of UHS 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' capacity growth initiatives, and moderate margin improvement are expected over the ratings horizon.
-- UHS' 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 thinks it is likely, however, that profit gains will begin to erode in later years due to an overall constrained healthcare reimbursement environment.
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+' ratings 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' 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 occur abruptly, but could materialize due to severe pricing pressures or unfavorable large-scale reform of
An upgrade of UHS' 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' reliance on government payers - as material going forward. Furthermore, UHS' 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.
DILIGENT DEBT REPAYMENT, MEASURED M&A STRATEGY CONTRASTS WITH PEERS
Most large acute care hospital operators have been active acquirers and aggressive in recruiting physicians and expanding outpatient service line offerings over the last few years. UHS has instead directed the majority of its FCF toward debt repayment. Debt-to-EBITDA has declined to 2.3x at
Each of UHS' acquisitions over the past four years has been of behavioral health targets, including the
STRENGTHENING CASH FLOWS, CAPITAL DEPLOYMENT STRATEGY SOMEWHAT UNCERTAIN
Fitch forecasts FCF of more than
UHS could become more aggressive in pursuing acquisition targets, particularly in the acute care space, as Fitch expects the pipeline of mid-sized single hospitals and smaller urban hospital networks coming up for sale will remain robust for at least the next few years. Furthermore, management has commented recently that purchase multiples seem to be moderating for possible targets. A resumption of share repurchases, which UHS has nearly eliminated from its capital deployment strategy over the last four years, is also possible.
ACA TO DRIVE BETTER PROFITABILITY
UHS is among the best-positioned for-profit hospital operators to benefit from lower bad debts in 2014 due to its presence in states expanding their
PERSISTENT ACUTE CARE VOLUME PRESSURES TO CONTINUE
Fitch thinks secular shifts in the setting of care delivery - toward lower-cost, often outpatient settings - and evolving components of especially government reimbursement (i.e. readmissions penalties and patient criteria) are increasingly to blame for weak same store admissions figures among acute care hospitals nationwide. Persistently weak economic growth and high unemployment in many markets are also pressuring both volumes and profitability, albeit now in a less pronounced manner.
Fitch continues to believe that mid-2013 was an inflection point at which admissions in UHS' core markets began to show signs of stabilization, though admission figures were fairly weak in 4Q'13 and 1Q'14. The ACA is not expected to meaningfully add to inpatient volumes in the near term, and overarching trends related to healthcare reform are likely to continue gradually shifting volumes to outpatient settings. As a result, moderately negative to possibly flat inpatient volumes are expected to be indicative of stable markets for UHS and its peers for the foreseeable future.
Commercial pricing remains strong and has largely offset the effects of
Fitch expects good behavioral volume growth over the ratings horizon in light of mental health parity rules, a possible bottoming of length of stay pressures, and UHS' capacity expansion initiatives. Notably, expanded
MOST DEBT MATURES IN 2016, LIQUIDITY IS AMPLE
Available liquidity is sufficient. Though UHS does not usually carry large amounts of cash (
Debt maturities are manageable for the firm, though the bulk of the outstanding term loans are due in
The secured debt rating remains 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' outstanding debt at
Additional information is available at 'www.fitchratings.com'.
--'Hospitals Credit Diagnosis' (
--'High-Yield Healthcare Checkup' (
--'For Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices' (
--'Margin Preservation Strategies: Different Angles (U.S. Hospitals and Health Insurers)' (
--'The Affordable Care Act and Healthcare Providers: Assessing the Potential Impact' (
--'Corporate Rating Methodology' (
Hospitals Credit Diagnosis (Consolidation Supports Growth in a Weak Organic Operating Environment)
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies
2014 Outlook: U.S. Healthcare Secular Challenges Require a Compelling Value Proposition
For-Profit Hospital Insights (Fitch's Annual Review of Bad Debt Accounting Policies and Practices)
Margin Preservation Strategies: Different Angles (Credit Implications for U.S. Hospitals and Health Insurers)
The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact)
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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