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
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
-- 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'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.
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
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 (
Debt maturities are manageable for the firm, though the bulk of the outstanding term loans are due in
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
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.
Additional information is available at 'www.fitchratings.com'.
--'U.S. Healthcare Stats Quarterly (First-Quarter 2014)' (
--'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' (
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
The Affordable Care Act and Healthcare Providers (Assessing the Potential Impact)
Margin Preservation Strategies -- Different Angles (Credit Implications for U.S. Hospitals and Health Insurers)
High-Yield Healthcare Checkup: Comprehensive Analysis of High-Yield U.S. Healthcare Companies
U.S. Healthcare Stats Quarterly (First-Quarter 2014)
Hospitals Credit Diagnosis (Implications of the ACA Slowly Taking Shape)
For-Profit Hospital Insights: Fitch's Annual Review of Bad Debt Accounting Policies and Practices
Source: Fitch Ratings
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