Moody's Raises Universal Health (UHS) CFR to 'Ba1'; Sees Moderate Financial Leverage Being Maintained

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.

You May Also Be Interested In

• Morgan Stanley Double Downgrades AU Optronics (2409:TT) (AUO) to Underweight
• Jefferies Upgrades Medpace (MEDP) to Buy, 'Big Margin Improvements'
• Goldman Sachs (GS) Exits Robo-investing For Masses In Deal With Betterment - Bloomberg