Community Health Systems Is in Talks to Extend Nearly $2 Billion in Debt
By Soma Biswas
Community Health Systems Inc., one of the largest publicly traded hospital chains in the U.S., is in talks with a group of bondholders led by Franklin Resources Inc. to extend nearly $2 billion in bonds coming due in 2019, according to people familiar with the matter.
While Community Health bondholders are talking to the company to try to extend debt maturities, other investors are shorting its bonds, betting that the company will have to restructure sooner rather than later, according to a person familiar with the matter.
The company has been trying to chip away at $15 billion in debt, which it took on partly to fund acquisitions such as the $7.3 billion purchase of Health Management Associates Inc. in 2014. At the same time, patient volumes have been declining at its rural and suburban hospitals.
The company's options are narrowing after having sold dozens of hospitals for billions of dollars and extended certain debt maturities.
Community Health still has the $1.9 billion unsecured note coming due Nov. 15, 2019, in which Franklin holds a big position. While it isn't due for another two years, the debt will be considered current a year ahead of that date, possibly triggering a default.
A spokeswoman for Franklin declined to comment. A spokeswoman for Community Health didn't immediately respond to a request for comment.
The company's third-quarter earnings report on Nov. 1 delivered the latest blow to it shares and bonds. The company's 6.875% notes due 2022 fell more than 3 points to 70 and its shares fell 46 cents, or 7.7%, to $5.44 a share on the day of the release. The 6.875% notes have since sold off further to 62.5 Friday, according to MarketAxess. For the third quarter ended Sept. 30, Community Health reported double-digit declines in operating revenue and adjusted earnings before interest taxes depreciation and amortization of 16.3% and 28.8%, respectively, to $3.7 billion and $331 million.
Community Health has already this year paid down $1.6 billion in debt with proceeds from the sale of 30 hospitals. As a result, the company brought debt down to $13.9 billion from $15 billion in the first three quarters of this year. And it is in talks to sell even more hospitals, with net revenue of at least $2 billion, according to a recent company presentation.
Community Health has also been working through a typical menu of options that highly leveraged companies have employed in today's robust high-yield markets to push out its debt maturities. For instance, in March the company sold $2.2 billion in secured notes due in 2023, using the proceeds to pay down bonds and loans due in 2018.
Pushing out debt due in 2019 will only provide a short-term reprieve to the hospital operator since the company faces billions of dollars in debt maturities every year from 2020 to 2023.
The company's stock price has dwindled from over $22 a share in November 2015 to $4.15 a share on Friday. Indeed, given that the company's $13.9 billion in debt is eight times Ebitda, debt investors argue there is little value left in the company's equity.
Community Health is in talks to swap the 2019 unsecured notes for new notes secured by the company's assets, one of the people familiar with the matter said. Such a transaction will be tricky, however, since the company's ability to issue new secured debt is limited to around $1 billion, according to one bondholder. For the company to be able to issue more secured debt in an exchange, the company may have to seek permission from its lenders to waive a covenant in its revolver loans that limits the amount of secured debt with the same priority level as the revolver in a restructuring, the bondholder noted.
If the company were to try to refinance the 2019 bonds in the market with new unsecured notes, investors would demand exorbitant interest rates on par with the current yield levels on its bonds, the bondholder noted. For example, the 8% notes due in 2019 were yielding 16.64% Friday, according to MarketAxess.
Write to Soma Biswas at firstname.lastname@example.org
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November 18, 2017 14:08 ET (19:08 GMT)Copyright (c) 2017 Dow Jones & Company, Inc.