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Fitch Affirms UHS Inc. at 'BBB+'; Stable Outlook.

NEW YORK -- Fitch Ratings has affirmed Universal Health Services, Inc.'s ratings as follows:

-- Issuer default rating (IDR) 'BBB+';

-- Senior unsecured debt 'BBB+';

-- Unsecured bank facility rating 'BBB+'.

The Rating Outlook is Stable.

Universal Health Services' (UHS) ratings reflect the company's diversity, operating performance, leading market positions in fast-growing markets, demonstrated success in integrating acquisitions, and financial discipline. Concerns center on bad debt exposure, erratic volume trends, competitive threats in key markets, and rising supply costs.

UHS remains one of the more conservative operators in the hospital management sector. The company has been diligent in pursuing its established strategy of focusing on mid-size markets with strong growth profiles on the acute care side while continuing to diversify its portfolio by growing the behavioral health business with select acquisitions.

As expected, UHS continues to feel the effects of some industry-wide pressures and some market-specific issues. Despite these issues the company continues to be well positioned, benefits from the diversity of its behavioral health business, continues to garner strong pricing, and demonstrates good cost controls, which ultimately generates strong free cash flow while continuing to maintain the most conservative balance sheet in the industry.

Credit metrics remain strong for the rating especially in light of significant debt reduction. UHS used cash flow plus proceeds from asset sales to bring debt down by more than $320 million since Dec. 31, 2004. LTM leverage at Sept. 30, 2005 was 1.0 times (x) as total debt was down to $532 million, nearly $200 million less than Fitch expectations. Fitch anticipates that leverage will increase modestly, depending on acquisition activity but will remain below 2.0x, given the company's historically conservative posture.

Cash flow remains strong as UHS generated approximately $200 million in free cash flow through LTM Sept. 30, 2005 or 37% of total debt. Coverage (EBITDA/gross interest) at Sept. 30, 2005 was 13.1x with funds from operations interest coverage of 10.6x.

In 2004, negative industry trends (soft volume and rising bad debt) coupled with some market-specific issues in key UHS markets eroded UHS' EBITDA margin. Margins remain volatile on a quarterly basis owing to the seasonality of the business (strong winter quarters and weak summer quarters) but have remained stable on an aggregate level.

Despite the influx of patient volumes, continued bad debt pressures have limited margin expansion despite good pricing. Bad debt levels across the sector remain high and remain a concern.

UHS' behavioral health business remains strong and patient volumes remain robust. The company's behavioral health business serves as a valuable offset to the more volatile acute care business. Volume trends are strong in the business and stand alone behavioral facilities do not contend with as pronounced bad debt concerns as the acute care business. Overall pricing trends remain favorable in this business. Additionally, the behavioral health business will benefit from Medicare reimbursement changes that were in the works for a number of years but were finally implemented effective Jan. 1, 2005.

Primary liquidity is provided through cash from operations and the company's $500 million unsecured revolving credit facility that expires in 2010. Net cash flow from operations through LTM Sept. 30, 2005 was $435 million and free cash flow was $192 million.

Total debt at Sept. 30, 2005 was $532 million. Term debt includes a $204 million 6.75% senior unsecured note due 2011 and a $300 million 5.0% convertible debenture due 2020. Pro forma debt at Dec. 21, 2005 was approximately $590 million following the company's Oct. 2005 acquisition of The Keys Group, which UHS partially funded with revolver borrowings. Cash at Sept. 30, 2005 was $82 million.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '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.
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Publication:Business Wire
Geographic Code:1USA
Date:Dec 22, 2005
Words:666
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