Community Health Pays Up for Bonds to Tame $13 Billion Debt Load

(Bloomberg) -- Community Health Systems Inc. paid up to sell bonds to refinance an upcoming term loan maturity as the hospital operator seeks to tame its $13 billion debt load.

The $1.6 billion of senior secured debt will be used to refinance a loan due 2021 of around the same amount, according to a statement Wednesday. The seven-year securities were sold on Thursday at 98.68 cents on the dollar to yield 8.25 percent, above the 7.875 percent to 8 percent range discussed earlier, according to a person with knowledge of the matter. The bonds can’t be bought back for three years, said the person, who asked not to be identified discussing private details.

With the refinancing, Community Health will reduce its amortization payments and possibly allow for future asset sale proceeds to be used toward its remaining 2019 and 2020 bond payments, according to Bloomberg Intelligence analyst Mike Holland. But he’s unconvinced that the move entails any material change to the company’s capital structure.

“We view the transaction as highly opportunistic, especially for the unsecured noteholders who will benefit from more time and runway,” Holland said in an email. “However, this trade does not really fix Community Health’s balance sheet, with a 2022 maturity still looming large as fundamentals remained challenged.”

Cutting Debt

The Franklin, Tennessee-based company has been looking for ways to cut down on more than $13 billion of long-term debt, a figure that Holland calculates as around eight times earnings before interest, taxes, depreciation and amortization. One tactic was to amend the company’s credit facility for some breathing room on its first-lien covenant ratio, while reducing its revolving commitments. Another has been selling assets: it sold 11 hospitals last year and already three more in 2019 as of last week.

Company representatives didn’t immediately respond to a message seeking comment, but during the Feb. 21 earnings call, the company said it will continue to sell hospitals and cut debt. Community has agreed to sell four more hospitals in South Carolina, with “letters of intent and advanced discussions on the rest of the portfolio that we’re counting into our 2019 divestitures,” said Chief Financial Officer Thomas Aaron.

Turnaround Effort

Community Health’s turnaround efforts may be yielding results after the company reported 2019 guidance that exceeded analyst expectations, causing shares and bonds to jump. Yet, its issues are far from resolved as some analysts still don’t expect the company to generate positive free cash flow this year.

“The company will generate little if any free cash flow over the next several years and will not be able to reduce debt at a faster pace than asset sales allow,” KDP Asset Management analyst Barbara Cappaert said in a Feb. 21 note. “As such, we expect refinancing issues to again become a problem in 2021 when roughly $2.6 billion of secured debt comes due.”

Credit Suisse Group AG, Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co., Royal Bank of Canada, Deutsche Bank AG, Goldman Sachs Group Inc. and SunTrust Banks Inc. managed the sale, the person said.

©2019 Bloomberg L.P.