NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has taken the following ratings actions on Universal Health Services, Inc. (UHS):
--Issuer Default Rating (IDR) downgraded to 'BB-' from 'BB';
--Senior unsecured bank credit facility downgraded to 'BB-' from 'BB';
--Senior unsecured notes downgraded to 'BB-' from 'BB';
--Senior secured bank credit facility affirmed at 'BB';
--Senior secured notes rating assigned at 'BB'.
The Rating Outlook is Stable. The ratings apply to approximately $883 million of debt outstanding at June 30, 2010.
RATINGS PROSPECTIVE FOR PSYCHIATRIC SOLUTIONS ACQUISITION:
On May 18, 2010, Fitch downgraded UHS's IDR to 'BB' from 'BBB', and placed all ratings on Rating Watch Negative following the company's announcement that it had agreed to purchase Psychiatric Solutions, Inc. (PSYS), in an entirely cash funded $3.1 billion transaction. Pending receipt of regulatory approvals and PSYS shareholder approval, the transaction is expected to close in the fourth quarter of 2010 (4Q'10). The $3.1 billion purchase price includes $2 billion to purchase PSYS equity, equating to $33.75 per share, plus the assumption of $1.1 billion of net debt of PSYS. UHS will fund almost 100% of the transaction cost through debt.
The transaction will significantly impact UHS's operating and credit metrics. Based on the last 12 months (LTM) June 30, 2010 results, outstanding debt of $883 million equaled 1.2 times (x) EBITDA of $715 million. Pro forma for the transaction, Fitch expects UHS to have approximately $4.1 billion in outstanding debt and to generate in the area of $1.1 billion of EBITDA, including about $330 million contributed by PSYS. Fitch expects debt to equal about 3.8x pro forma EBITDA prior to any potential debt reduction post the acquisition. Although pro forma debt leverage is somewhat elevated relative to UHS's 'BB-' IDR, the rating is supported by the following factors:
--Fitch's pro forma EBITDA does not take into account the potential for cost synergies beyond the elimination of about $40 million of duplicative corporate expense in 2011. PSYS's EBITDA margin runs about 200-250 basis points (bp) below UHS's behavioral health segment EBITDA margin, providing support for the expectation that there is upside potential for EBITDA growth through improvement of PSYS's profitability.
--There is the potential for debt reduction post acquisition through free cash flow (FCF), or through the application of asset sale proceeds. Some level of divestitures in areas of geographic overlap is highly likely in order to obtain regulatory approvals necessary for the acquisition to proceed.
--The acquisition will significantly expand UHS's presence in the behavioral health space. PSYS is the largest standalone operator of freestanding inpatient psych facilities, with 94 facilities in 32 states, Puerto Rico and the US Virgin Islands. UHS's behavioral health segment provides operational diversification that is unique amongst for-profit hospital providers. In general, relative to the acute care hospital segment, behavioral health operations are more profitable, exhibit less volatility in patient volumes and revenues and are less vulnerable to certain challenges faced by the acute care segment, including high levels of uncompensated care and significant regulatory risk. For the LTM ended June 30, 2010, UHS's behavioral health segment contributed about 26% of the company's revenues and about 39% of its EBITDA. Fitch estimates that post acquisition, the contribution of the behavioral segment will increase to 45% of revenue and 55% of EBITDA. In addition, the acquisition will increase UHS's geographic diversity, ameliorating credit risk related to its high degree of exposure to the Las Vegas, NV market, which represented about 22% of revenues in 2009.
IMPACT OF ACQUISTION ON CAPITAL STRUCTURE:
The majority of the financing for the acquisition will come from the new bank credit facility which UHS launched in 3Q'10. The new facility commitment totals $3.45 billion and consists of:
--An $800 million revolving credit agreement;
--A $1.05 billion term loan A;
--A $1.6 billion term loan B.
Fitch rated the new credit facility 'BB' in June 2010, and maintenance of the rating one-notch above the 'BB-' IDR is supported by the credit facility collateral, which is expected to include hard asset security in the form of real estate owned by UHS and its domestic subsidiaries. This represents higher quality collateral relative to the existing bank credit facility, rated on par with the IDR, and which is unsecured. The unsecured credit facility will remain outstanding until the new credit facility becomes effective, which will occur upon the closing of the acquisition. At that time, the unsecured credit facility will be replaced and Fitch plans to withdraw the rating.
The only pieces of UHS's current capital structure that will remain outstanding after the acquisition are the 2011 and 2016 senior notes; because of the limitations on liens provision in the notes indenture, Fitch believes the notes will become secured on a parity basis with the new credit facility when the facility becomes effective. Therefore, the note rating is downgraded to 'BB-' at this time. Fitch has established a senior secured notes rating of 'BB'; when the new credit facility becomes effective and the senior notes become secured, Fitch expects to rate the notes 'BB'.
Other sources of financing to be used for the acquisition include $250 million of new senior unsecured notes which UHS plans to issue later in 2010. These notes will be heavily subordinated, as 93% of debt will be secured through the bank debt and existing 2011 and 2016 notes. Therefore, recovery for holders of these notes in the event of liquidation or restructuring will be prejudiced, and Fitch expects it will rate the unsecured notes 'B+', one-notch below the IDR. Based on the assumed capital structure and Fitch's pro forma EBITDA estimate, debt-to-EBITDA will be 3.0x through the bank facility, 3.6x through the secured debt and 3.8x through the unsecured debt.
SOLID LIQUIDITY PROFILE:
Fitch believes UHS has sufficient liquidity to fund its operating and financing needs over the near term. Liquidity is provided primarily through cash from operations ($456 million for the LTM ended June 30, 2010), and the $800 million unsecured credit revolver ($571 million available at June 30, 2010). UHS had $12.3 million in cash on hand at June 30, 2010 and FCF was $119.4 million for the LTM period. Based on a conservative operating scenario for the combined UHS/PSYS, Fitch expects annual FCF (defined as CFO less dividends and capital expenditure) generation to stabilize around $150 million, indicative of around a 2% FCF margin.
Near-term debt maturities should be manageable; the next significant maturities occur in 2011, when the unsecured bank credit revolver ($166 million drawn as of June 30, 2010) and the $200 million 6.75% senior notes are due in July and November, respectively. Fitch expects the outstanding amount on the revolver to be refinanced when the new credit facilities become effective, anticipated in 4Q'10. In the event internal liquidity is not sufficient to fund the $200 senior note maturity in November 2011, Fitch believes UHS will have adequate capital market access or sufficient capacity on its bank credit revolver to refinance the maturity.
GUIDELINES FOR FURTHER RATING ACTIONS:
As indicated by the Stable Rating Outlook, Fitch believes a change in the ratings is unlikely over the next 12-24 months. However, if debt leverage reduction post the acquisition were to outpace Fitch's expectations due to some combination of above projected growth in EBITDA and more aggressive than anticipated debt reduction, leading to debt-to-EBITDA falling to near 3.0x in the near term, it could precipitate a positive rating action.
Total debt of $883 million at June 30, 2010 consisted primarily of:
Senior unsecured credit facility
--$200 million A/R securitization facility due August 2010 ($100 million outstanding at June 30, 2010), replaced with new $250 million A/R securitization program;
--$166 million due 2011.
Senior notes
--$200 million due 2011;
--$400 million due 2016.
Additional information is available at www.fitchratings.com.
These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:
--'Corporate Rating Methodology' Aug. 16, 2010;
--'Liquidity Considerations for Corporate Issuers' June 7, 2007.
Related Research:
--'Healthcare Stats Quarterly' June 17, 2010;
--'Fitch's For-Profit Hospital Quarterly Diagnosis' June 14, 2010;
--'Healthcare Reform Update: Early Results' May 12, 2010.
Related Research:
Liquidity Considerations for Corporate Issuers
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=328666
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
Healthcare Stats Quarterly -- First Quarter 2010
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=532689
Healthcare Reform Update: Early Results
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=525945
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CONTACT:
Fitch Ratings, New York
Cindy Stoller, +1-212-908-0526
[email protected]
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Primary Analyst:
Megan Neuburger, +1-212-908-0501
Director
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
Bob Kirby, CFA, +1-312-368-3147
Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
KEYWORDS: United States North America New York Pennsylvania
INDUSTRY KEYWORDS: Health Hospitals Mental Health Professional Services Finance
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