September 17, 2012 / 8:28 PM / 5 years ago

TEXT-S&P rates Universal Health Services term loan 'BB+'

Overview
     -- U.S. hospital operator Universal Health Services is refinancing the 
balance of its term loan B, and repaying borrowings under its revolving credit 
facility and accounts receivable securitization program with a new $500 
million term loan A-2. Debt levels are virtually unchanged.
     -- We are assigning our 'BB+' issue-level rating and '2' recovery rating 
to its proposed secured term loan.
     -- We are also affirming our ratings on the company, including our 'BB' 
corporate credit rating, our 'BB+' rating on its existing senior secured debt, 
and our 'B+' rating on its unsecured debt.
     -- Our stable rating outlook on Universal reflects our view that it will 
continue to benefit from low-single-digit organic growth and focus on growing 
its behavioral health segment so that its financial risk profile remains near 
its current level.

Rating Action
On Sept. 17, 2012, Standard & Poor's Ratings Services affirmed its 'BB' 
corporate credit, 'BB+' senior debt, and 'B+' unsecured debt ratings on King 
of Prussia, Penn.-based Universal Health Services Inc.. The '2' recovery
rating on the senior debt and the '6' recovery rating on the unsecured debt
remain unchanged. The outlook is stable.

At the same time, we assigned a 'BB+' issue-level rating (one-notch above the 
corporate credit rating) and a '2' recovery rating to the company's proposed 
$500 million term loan A-2 debt due in 2016. The '2' recovery rating indicates 
our expectation of substantial (70%-90%) recovery for lenders in the event of 
default and the '6' recovery rating indicates expectations for negligible 
(0%-10%) recovery.

Rationale
The rating on Universal is based on our assessment of its business risk 
profile as "fair," reflecting the benefits of its increasing market presence 
and high margins in its rapidly growing inpatient behavioral business which 
somewhat eases the reimbursement risks associated with its less profitable 
acute care business segment. We consider the financial risk profile 
"significant," reflecting our expectation that leverage will remain in the 
low-3x area, and that the company will continue to follow a relatively modest 
growth strategy. Universal is an owner and operator of acute care hospitals, 
behavioral health hospitals, and ambulatory centers nationwide and in Puerto 
Rico and the U.S. Virgin Islands. 

Universal's recent results through mid-2012 are consistent with our 
expectations. The rating reflects our expectation that the hospital company's 
revenues in 2012 will grow by about 4% on a comparable basis, including the 
new accounting methodology for bad debt. This assumes the second half of the 
year is a little stronger than the first half due to a higher rate of growth 
in the behavioral health segment. We do not expect any acquisition-related 
growth in 2012, but do expect the pending acquisition of Ascend Health Corp. 
to be completed by the end of the year, adding about $200 million of revenue 
in 2013. For 2013, we expect revenue to increase by about 6.5%. We believe 
Universal will keep seeking small, accretive acquisitions of behavioral 
facilities that should help it sustain its overall growth rate near 5%. 
Universal's organic growth rate, which outpaces the 2% rise in 2012 GDP 
expected by our economists in their base case, is aided by Universal's solid 
growth in behavioral services patient volume, and its still-favorable 
mid-single-digit rate increases from private insurance companies at its acute 
care hospitals. Industry demand for behavioral services is strong, and 
generally more favorable reimbursement for behavioral hospitals tends to 
result in higher margins. We expect Universal's overall margins to remain 
relatively flat at about 18% as improving margins for the behavioral business 
offset declining margins of the acute care business.

We expect leverage to remain relatively close to 3x for the next year, 
consistent with the range for a significant financial profile. Although we 
expect Universal to generate about $350 million of free cash flow, we expect 
the funding needs for the acquisition of Ascend (net of proceeds received for 
asset sales), and possibly a modest investment to repurchase shares, to limit 
the amount of debt repayment in 2012. We do not believe additional acquisition 
activity will be substantial because there are no real acquisition targets the 
size of Psychiatric Solutions, and we do not believe Universal will pursue a 
large acquisition in the acute care segment. 

Our view of Universal's "fair" business risk profile benefits from our 
perspective that, while Universal is subject to the uncertainties of 
reimbursement in both segments and still-high levels of uncompensated care in 
the acute care hospitals, these risks are diversified across two distinct 
businesses. We also assess the reimbursement risks associated with the 
behavioral health care segment, particularly as subsectors that generate 
strong margins may be targets for reimbursement cuts. Universal's hospital 
portfolio's focus primarily on two businesses--acute care hospital services 
and behavioral health care services--is unique. As of the quarter ended June 
30, 2012, the behavioral health services segment now generates more revenue 
than the acute care hospital services segment. We expect the higher growth 
rate and greater acquisition focus for behavioral health services to continue, 
and that over time the behavioral segment will generate an increasing 
percentage of total revenues. The growth rate of the behavioral health segment 
exceeds 5%, compared with the acute care segment's recent 1% growth rate. We 
believe the majority of operating income is now generated by behavioral health 
services because of far superior margin compared with the acute care hospital 
segment. 

Liquidity
Universal Health's liquidity is "strong." Sources of cash are expected to 
exceed uses over the next 12 to 24 months. Relevant aspects of Universal's 
liquidity are: 
     -- We expect coverage of uses to average about 2.4x in the next 12 to 18 
months.
     -- Sources of liquidity include about $835 million of funds from 
operations (FFO) before capital expenses and acquisition spending, cash and 
available-for-sale securities of $33 million, and about $600 million of 
availability on its revolving credit facility after outstanding letters of 
credit.
     -- We expect uses of liquidity to include some investment in working 
capital and acquisition spending that we believe could average about $200 
million beginning in 2013. We expect capital expenditures of about $400 
million in 2013.
     -- We expect Universal will have at least a 30% cushion for a total debt 
leverage covenant on its credit facility. The leverage covenant steps down 25 
basis points (bps) in the first quarter of 2013. 
     -- We believe the company has sound relationships with banks as the 
company has had ready access to the capital markets.
     -- Universal does not have any significant debt maturities until 2016.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Universal, to be published separately on RatingsDirect.

Outlook
Our stable rating outlook on Universal reflects our view that it will continue 
to benefit from low-single-digit organic growth and that it will continue to 
focus on the behavioral health segment as its key growth platform. We also do 
not expect Universal to deviate from its core competencies in its two segments 
and that it will not make any large, credit transforming acquisitions for the 
foreseeable future. We expect leverage to remain level at about 3.1x in 2012, 
and possibly decline to slightly below 3.0x by the end of 2013. If Universal 
reduces this level to the high-2x area and increase FFO to lease-adjusted debt 
to the high-20% area from the current level of about 22%, we could consider 
raising the rating. To achieve this, the company would have to overcome 
reimbursement pressure, increasing its EBITDA margin by about 100 bps with a 
revenue growth rate of at least 6%. 

If reimbursement weakens, or other industry factors such as local competition 
contribute to a 450-bp decline in its EBITDA margin to about 13%, or a more 
aggressive financial policy contributes to an increase in leverage to at least 
4x, we would consider a lower rating. 

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 

Ratings List

Ratings Affirmed

Universal Health Services Inc.
 Corporate Credit Rating                BB/Stable/--       

New Ratings

Universal Health Services Inc.
 Senior Secured                                        
  US$500 mil term loan A-2 bank ln      BB+                
  due 2016                            
   Recovery Rating                      2                  

Ratings Affirmed; Recovery Ratings Unchanged

Universal Health Services Inc.
 Senior Secured                         BB+                
   Recovery Rating                      2                  
 Senior Unsecured 7% nts                B+                 
   Recovery Rating                      6                  
 Senior Unsecured 7.125% nts            BB+                
   Recovery Rating                      2                  



Complete ratings information is available to subscribers of RatingsDirect on 
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 
by this rating action can be found on Standard & Poor's public Web site at 
www.standardandpoors.com. Use the Ratings search box located in the left 
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