Community Health’s Distressed Debt Dogs Hospital Sale Effort

By John Lauerman and Sridhar Natarajan
(Bloomberg) — Community Health Systems Inc.’s descent into distress is complicating the hospital chain’s effort to dig out by selling off assets. Publicly traded rivals such as HCA Holdings Inc. and Tenet Healthcare Corp. probably aren’t interested in a full-scale takeover, according to analysts. A major obstacle, and the pressure point for Community Health, is the company’s $15 billion in debt, with large chunks starting to come due in 2018 and much of it trading at deep discounts after two consecutive quarterly losses. “The more likely case is small-scale divestitures,” Eric Axon, a CreditSights analyst, said in an interview Monday. “But with the assets they are trying to get rid of, it’s hard to make the case that it will lead to material deleveraging.” That gives the owner of about 150 hospitals a weak hand as it looks for more deals with rival hospitals, local chains seeking to expand or private-equity firms that plan on cutting costs. Losses at Community Health, once the biggest U.S. for-profit hospital chain, have topped $1.4 billion this year, and its bonds have slipped into distressed territory. It’s struggling to improve performance at its facilities, many of them outside urban centers and beset by low or negative margins.

Crown Jewels

Buyers will want to purchase money-making properties, and those are the ones Community Health can least afford to lose, said Sheryl Skolnick, an analyst with Mizuho Securities who cut her rating on the shares last week to the equivalent of sell. There may be some demand for a cluster of hospitals in and around Fort Wayne, Indiana, which generates 12 percent to 13 percent of earnings before taxes, interest, depreciation and amortization, she estimates. Selling that would be “a last, desperate act,” she said. “When you can’t sell anything else, you sell your crown jewel.” Representatives of Tenet and HCA declined to comment on potential deals. Community Health said Sept. 19 that it hired advisers to explore possible transactions. On a conference call with analysts, Chief Executive Officer Wayne T. Smith said the company is involved in seven transactions to sell 17 hospitals and other facilities that generate annual revenue of $2 billion. That includes previously announced agreements to sell four hospitals and an 80 percent interest in the home care division. Community Health said proceeds could total about $1.2 billion, but Barbara Cappaert, a credit analyst at KDP Investment Advisors Inc., told clients in a note she’s discounting the sum because the deals look like a fire sale. “The longer they’re waiting, they’ve clearly made it worse,” said Vicki Bryan, an analyst with debt-research firm Gimme Credit. “Their portfolio is deteriorating rapidly.”

Bonds Slide

Community Health’s bonds were among the worst performers in the healthcare sector in October, handing investors an 8.9 percent loss, Bank of America Merrill Lynch index data show. Its $3 billion of 6.875 percent 2022 notes were among the worst hit, dropping as low as 72.625 cents on Nov. 1, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority. They’re rated seven levels below investment grade, with S&P Global Ratings questioning Community Health’s ability to sell assets.
Adjusted Ebitda, an earnings measure used to gauge a company’s ability to pay its debts, slid 30 percent to $465 million in the third quarter, Community Health said Oct. 26. The stock is down 90 percent from its $52.71 peak in June 2015, with a current market value barely above $600 million. While the company’s earnings call “attempted to portray a contrite management team with a viable plan to stabilize the business, we think investors were generally left unconvinced,” Citigroup Inc. analysts wrote.

Rural Woes

Analysts trace the company’s troubles back to its acquisition of rival Health Management Associates. Community Health’s management has said that many of those hospitals continue to perform poorly. Rural hospitals like the ones it owns have been hurt more than some urban rivals by cost-cutting from government and private health insurers, which are pushing care into cheaper outpatient settings. Many facilities owned by the company are in states that haven’t expanded Medicaid, which means the chain misses out on millions of dollars in reimbursement for care of the poor. Community Health may want to exit remote markets in which it has few hospitals, such as Alaska, where it has just one in the city of Palmer, said John Morrow, managing director of Franklin Trust Ratings. Nonprofit systems such as the University of Pittsburgh Medical Center bought hospitals in the central and northern parts of Pennsylvania and may be interested in some of Community Health’s properties in the state, Morrow said. Susan Manko, a spokeswoman for UPMC, said she couldn’t comment on potential purchases. Curae Health Inc. agreed in September to acquire four
Community Health facilities in Mississippi and Florida for an undisclosed price. Its appetite may not be widely shared, said Steve Clapp, the chain’s chief executive officer. “On the for-profit side, there’s a lot of desire to have high-margin, high-return facilities and provide that for shareholders,” he said in a telephone interview. “The question is, is the target margin available in the rural hospital space?”