Moody's Raises Universal Health (UHS) CFR to 'Ba1'; Sees Moderate Financial Leverage Being Maintained Jul 25, 2014 03:31PM

Moody's Investors Service upgraded the Corporate Family and Probability of Default Ratings of Universal Health Services, Inc. (NYSE: UHS) to Ba1 and Ba1-PD from Ba2 and Ba2-PD, respectively. Moody's also upgraded the ratings on the company's senior secured debt to Ba1 (LGD 3) from Ba2 (LGD 3) and senior unsecured debt to Ba2 (LGD 6) from B1 (LGD 6). The rating outlook was changed to stable from positive. UHS' Speculative Grade Liquidity Rating was also upgraded to SGL-1 reflecting Moody's expectation that the company will maintain very good liquidity over the next 12 -- 18 months.

"The upgrade of Universal Health's rating to Ba1 reflects our expectation that the company will maintain moderate financial leverage, and in fact maintain some of the most conservative credit metrics among for-profit hospital operators," stated Dean Diaz, a Moody's Senior Vice President. "Universal Health's credit metrics will continue to benefit from strong margins and growth in the fragmented behavioral health segment as well as the positive impact from the Affordable Care Act and improving conditions in certain markets that will enhance the operating results of the company's acute care hospital business," continued Diaz.

Following is a summary of Moody's actions.

Ratings upgraded:

Corporate Family Rating to Ba1 from Ba2

Probability of Default Rating to Ba1-PD from Ba2-PD

Senior secured credit facilities to Ba1 (LGD 3) from Ba2 (LGD 3)

Senior secured notes due 2016 to Ba1 (LGD 3) from Ba2 (LGD 3)

Senior unsecured notes to Ba2 (LGD 6) from B1 (LGD 6)

Speculative Grade Liquidity Rating at SGL-1 from SGL-2

RATINGS RATIONALE

UHS' Ba1 Corporate Family Rating reflects Moody's expectation of continued EBITDA growth, stable cash flow and strong interest coverage. Moody's believes the company will continue to operate with modest leverage and remain disciplined with respect to the use of incremental debt for acquisitions or shareholder initiatives. However, Moody's expects that UHS will continue to be acquisitive and invest in growth initiatives, which will limit debt repayment. While Moody's anticipates a challenging operating environment in the acute care business in the near term, characterized by pressure on reimbursement rates and weak volume trends, the segment should begin to benefit from a reduction in bad debt expense as uninsured individuals that have gained coverage under the Affordable Care Act seek services in the company's facilities. Further, the rating incorporates the benefit of diversification provided by UHS' behavioral health segment, which is reimbursed under a separate methodology from the acute care operations, thereby lowering the risk of a regulatory change that could impact the company as a whole.

The stable rating outlook reflects Moody's expectation that continued growth in the behavioral segment and benefits to the acute care segment from the ACA will contribute to positive operating results and strong credit metrics. Moody's also expects that the company will maintain modest leverage levels even while pursuing acquisitions and investments in growth initiatives. The outlook also reflects Moody's expectation that UHS will remain disciplined towards increasing leverage for shareholder initiatives.

An upgrade of the rating to investment grade is not likely in the near term given Moody's expectation that the company's reinvestment in growth through capital projects and acquisitions will limit a meaningful improvement credit metrics from current levels. Moody's could consider an upgrade if UHS can continue to grow EBITDA, either through acquisitions that are funded out of available cash flow or meaningful improvement in the acute care business, and repay debt such that leverage is expected to be sustained below 2.5 times. Additionally, UHS would need to make a public commitment to an investment grade rating, including maintaining a conservative financial policy and a disciplined approach to capital deployment.

A decline in operating performance resulting in an expectation that adjusted debt to EBITDA will remain above 3.0 times could result in a downgrade of the ratings. Additionally, a significant debt financed acquisition or shareholder initiative could result in a downgrade.

The principal methodology used in this rating was the Global Healthcare Service Providers published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.


Moody's Places Cliffs Natural (CLF) Rating on Review for Downgrade Jul 25, 2014 02:58PM

Moody's Investors Service placed Cliffs Natural Resources (NYSE: CLF) Baa3 senior unsecured ratings under review for downgrade.

..Issuer: Cliffs Natural Resources Inc.

On Review for Possible Downgrade:

....Multiple Seniority Shelf Feb 11, 2016, Placed on Review for Possible Downgrade, currently (P)Baa3

....Senior Unsecured Regular Bond/Debentures, Placed on Review for Possible Downgrade, currently Baa3

Outlook Actions:

....Outlook, Changed To Rating Under Review From Negative

RATINGS RATIONALE

The review results from the expected further deterioration in earnings and debt protection metrics on the drop in iron ore prices, which we believe will be sustained at lower price points than previously anticipated through at least 2015. Since January 2014 spot iron ore prices (62%Fe) have fallen roughly 30% to around $94/tonne on July 24, 2014 on increased iron ore production and a steel market evidencing only sluggish production growth, particularly the important Chinese steel industry. While the downward price movement has slowed and prices have recently been trading between roughly $95/tonne and $105/tonne, we expect prices to remain within this range with risk to the downside. Although Cliffs performance is not directly correlated to price movement in the seaborne market given the contract nature of its US operations, movement in this market will have an impact on a lag basis. Cliffs' Canadian and Asia Pacific operations are more sensitive to the movement in the seaborne price. At iron ore prices averaging below $110/tonne over the next one to two years, we expect Cliffs' leverage, as measured by the debt/EBITDA ratio to exceed 4x.

The review also considers the uncertainty relating to the business direction and management of the company arising from the proxy battle with Casablanca Capital. The conclusion of the review could result in a downgrade of 1 or possibly 2 notches.

Moody's review will focus on expected volume levels and recovery from the lower levels caused by the adverse winter weather, levers the company has to further reduce costs, the net benefit or reduction in losses caused by the potential idling of the Pinnacle coal mine given the adverse metallurgical coal market conditions, and the level of earnings that can be generated in a sustained lower iron ore price environment. The review will also focus on Cliffs' customer base given the recent announcement by Essar Steel Algoma of a refinancing and recapitalization under a Plan of Arrangement under the Canada Business Corporations Act and AK Steel's pending acquisition of certain assets of Severstal North America, a subsidiary of Severstal OAO, including the steel assets located in Dearborn Michigan. In addition, the status of the phase II expansion of Bloom Lake and options for such development will be a consideration in the review as will the company's ability to maintain its production profile given the depleting nature of its reserve base. The outcome of the shareholder vote on board of director composition at the July 29, 2014 annual meeting and any potential changes in business strategy will also be evaluated.


Gray Television's (GTN) Acquisition of WTVG-TV and WJRT-TV has No Impact on Ratings - Moody's Jul 25, 2014 02:55PM

Moody's says on July 24, 2014, Gray Television, Inc. (NYSE: GTN) announced its agreement with SJL Holdings, LLC ("SJL") to acquire WJRT-TV, an ABC affiliate serving the Flint-Saginaw-Bay City, MI market and WTVG-TV, an ABC/CW affiliate serving the Toledo, OH market for approximately $128 million in cash. There is no immediate impact to Gray's debt ratings or the positive outlook as we expect overall financial metrics and operating performance to remain within the B3 Corporate Family Rating. The transaction does not increase debt-to-EBITDA ratios above 6.2x pre-transaction levels (pro forma for recently closed Hoak transaction, including Moody's standard adjustments); however, net leverage increases nominally. The acquisition is subject to regulatory approval and is expected to close by Q4 of 2014.


S&P Places Steel Dynamics (STLD) on CreditWatch Negative Following Severstal Columbus M&A News Jul 25, 2014 02:09PM

Standard & Poor's Ratings Services said it placed its ratings, including its 'BB+' corporate credit rating, on Fort Wayne, Ind.-based Steel Dynamics Inc. (Nasdaq: STLD) on CreditWatch with negative implications.

The CreditWatch negative listing follows Steel Dynamics' announcement that it will acquire Severstal Columbus, a steel production mini-mill, for $1.625 billion.

We estimate that the transaction could weaken Steel Dynamics' credit measures over at least the next year, with pro forma leverage, as measured by debt to EBITDA, exceeding our previously expected 2014 year-end leverage of about 3x.

"We will resolve the CreditWatch listing following our review of the financing details of the pending transaction and implications for Steel Dynamic's business and financial risk profiles," said Standard & Poor's credit analyst Funmi Afonja. "Upon completion of our review, we could leave the ratings unchanged or lower them. Based on preliminary information, we believe that if we were to lower the ratings, the downgrade would not exceed one notch," she added.


Fitch Affirms Ratings on Baidu.com (BIDU) Following Q2 Results Jul 25, 2014 07:56AM

Fitch Ratings says that Baidu, Inc.'s (Nasdaq: BIDU)(A/Stable) continued solid performance in 2Q14 reinforces our belief that Baidu's cross-channel leadership in search advertising in China will continue to sustain its credit profile, which will also be supported by its continued investments in the mobile platform and new technologies.

Fitch expects there will continue to be strong growth in Baidu's mobile revenues in the next two to three years due to the company's leading positions in mobile search, mobile map and app distribution, which are the three key entry points to the internet. Its search app, Mobile Baidu, had 70m daily active users and its mobile map app had 200m monthly active users in 2Q14. In addition, the combined Baidu and 91 Wireless platform distributes over 130m app downloads daily.

Fitch believes that Baidu will continue to benefit from increasing budgets for advertising on the mobile platform. In 2Q14, mobile search traffic again was the major driver of Baidu's overall traffic growth. In terms of monetisation, Baidu reported that the number of paid clicks, cost-per-click and click-through rates are improving, largely due to the company's investments in mobile and technologies such as deep learning. As a result, Baidu's revenue grew at 59% yoy in 2Q14 and mobile revenue reached 30% of its 2Q14 revenue.

Baidu's margins are likely to recover in the next two years after the transition to develop its mobile platform. Baidu is committed to further strengthen its market position and will continue to invest in its mobile services. This may constrain margin improvements in the short term. However, margins should recover when mobile monetisation further improves and spending stabilises. In 2Q14, Baidu's EBIT margin rebounded to 30% from 25% in 1Q14, due to a slowdown in pre-installation spending and content costs.

Fitch expects Baidu to maintain strong financial flexibility and ample liquidity over the medium term. The company generated strong cash flow in 2Q14 with net operating cash flow increasing to CNY4.1bn from CNY3.6bn in 1Q14. Including short-term investments, where the company parks its surplus cash, Baidu had unrestricted cash of CNY12.4bn and near cash of CNY36.3bn at end-June 2014, which together were equivalent to 200% of its total debt.

Baidu currently is well above the floor of its ratings' limits. However, Fitch may downgrade the ratings if there is evidence of greater government, regulatory or legal intervention leading to an adverse change in the company's operations, profitability or market share; Baidu's operating EBIT margin drops to below 10% (35.0% in 2013); pre-dividend free cash flow/sales ratio falls below 10% (31.7% in 2013); or funds flow from operations-adjusted leverage rises above 2x (1.7x for 2013), all on a sustained basis.

For the short to medium term, Baidu profile is at its ratings' ceiling and takes into account Fitch's expectation of profit growth. Fitch may consider an upgrade if the company develops businesses that materially diversify cash generation away from operations that are subject to Chinese government and regulatory risk, provided such diversification does not damage the company's financial profile.


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