Fitch Rates Universal Health Services' Secured Notes 'BBB-/RR1'; Outlook Stable

CHICAGO--()--Fitch Ratings has assigned a 'BBB-'/'RR1' rating to Universal Health Services, Inc.'s (UHS) new senior secured notes maturing in 2022 and 2026. The total note offering amounts to $800 million in senior secured notes. The proceeds are expected to be used to refinance existing indebtedness.

UHS's Issuer Default Rating (IDR) is currently 'BB+'. The Rating Outlook is Stable. The ratings apply to $3.3 billion of debt outstanding at March 31, 2016. A full list of UHS's ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch-calculated gross debt/EBITDA at March 31, 2016 of 1.9x is the strongest among Fitch-rated for-profit healthcare providers and much improved compared to 3.6x following the November 2010 acquisition of Psychiatric Solutions, Inc. (PSI). A focus on debt repayment and recent EBITDA growth has resulted in stronger credit metrics.

Cash flows are supported by improved organic growth in patient volumes in the acute care segment, helped by recovering macro-economic conditions in UHS's largest hospital markets, and the health insurance expansion components of the Affordable Care Act (ACA). FCF (free cash flow, cash from operations less dividends and capital expenditures) was $694 million at March 31, 2016.

Business risk related to the acute care hospital segment is mitigated by UHS's behavorial health operations, which comprise about half of the company's revenues. Good organic growth in the mid-single digits and moderately improving profit margins are expected for the behavioral health segment over the ratings horizon. Recent acquisitions are in line with Fitch's expectation that opportunities to expand the behavioral health segment will be a primary focus of capital deployment for UHS.

UHS's acute care segment outperformed the peer group in 2015, with same-hospital admissions and adjusted admissions growth of 4.2% and 5.4%, respectively. Same-facility net revenue per adjusted admission growth also was the strongest among peers at 3.9%. Fitch expects UHS to continue reporting volumes and pricing among the best in the industry, thanks in large part to its strong share in favorable markets.

Fitch expects 2016 to be less favorable for UHS and its for-profit acute care hospital peers, as volumes shift toward lower-cost outpatient facilities and are compared to an exceptional 2015. Hospital industry management teams are contending with a very dynamic operating environment due to the evolution of payment schemes and other regulatory reforms influencing organic operating trends.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for UHS include:

--Organic revenue growth of 7.5% and 6.0%% in 2016 and 2017, respectively, mostly driven by continued strong performance of the acute care segment;

--Modest operating EBITDA margin expansion in 2016, experiencing headwinds thereafter, primarily as a result of negative operating leverage as acute care patient volume growth rates normalize versus the higher level seen in 2014 - 2015 level and growth in pricing slows;

--Fitch forecasts EBITDA of $1.8 billion and discretionary FCF of $600 million in 2016 for UHS, with capital expenditures of $425 million;

--The majority of discretionary FCF is directed towards share repurchases and acquisitions, resulting in gross debt/EBITDA of around 1.9x through the forecast period.

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 U.S. healthcare.

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.

At current levels, UHS's financial and credit metrics could support a higher rating. However, an upgrade of the ratings is constrained by the fact that the balance sheet strength may be transient. Fitch believes the company would be willing to materially increase debt to participate in the consolidation of the healthcare provider space, as it did to finance the acquisition of Psychiatric Solutions in 2010. Fitch expects consolidation of the healthcare provider space to continue through the intermediate term.

DEBT MATURITIES EXTENDED, LIQUIDITY SOLID

Available liquidity is sufficient. Though UHS does not usually carry large amounts of cash ($55 million at March 31, 2016), it maintains an $800 million revolver, of which $551 million was available at March 31, 2016. UHS also maintains a $360 million A/R facility, of which $50 million was available at March 31, 2016.

Fitch expects the proceeds of the new issue to be used to refinance upcoming debt maturities; UHS has $400 million of secured notes maturing later in 2016. Other large maturities occur in 2019 and later.

FULL LIST OF RATING ACTIONS

Fitch rates UHS as follows:

--IDR 'BB+';

--Senior secured bank facility 'BBB-/RR1';

--Senior secured notes 'BBB-/RR1';

The Rating Outlook is Stable.

Date of Relevant Rating Committee: 7, October 2015.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (pub. 05 Apr 2016)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=879564

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004774

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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. 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.

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Jacob Bostwick, CPA
Director
+1-312-368-3169
Fitch Ratings, Inc.
70 W Madison Street
Chicago, IL 60602
or
Secondary Analyst
Megan Neuburger, CFA
Managing Director
+1-212-908-0501
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations:
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com