Community Health Taps Into Junk-Bond Frenzy to Tame Debt

Community Health Systems Inc., the debt-laden hospital chain that’s been staging a comeback, has more than doubled the size of a bond offering as it takes advantage of some of the lowest yields ever for speculative-grade issuers.

After strong recent earnings results, the company is using the momentum to refinance a high coupon and push out maturities.

Community is selling a $1.8 billion high-yield bond maturing in 2029 and announced a related tender offer Tuesday. The bond offering’s size was increased from $750 million due to strong demand from investors.

The company is using the proceeds to buy back its outstanding $1.77 billion of 9.875% junior-priority secured notes due 2023, according to a news release. Meanwhile, pricing discussions on the high-yield bond sale to fund the offer are in the 7% area, according to people familiar with the matter who asked not to be named discussing a private transaction.

Low yields are propelling a busy junk bond calendar that has already seen more than $22 billion of new deals price this month. Yields for CCC rated companies -- the riskiest tier of junk -- stand at 6.7%, the lowest since 2014, according to Bloomberg Barclays index data. Average yields across the high-yield index closed at 4.18% on Friday, just 0.02 percentage point off the all-time low of 4.16%.

That supportive environment is helping companies like Community Health refinance debt at lower rates to lock in savings and chip away at high debt loads. In December, the hospital chain refinanced a portion of its other series of notes due 2023, in that case with a 6.25% coupon, to extend maturities.

“The market environment is highly conducive to Community Health extending maturities despite an ongoing pressured fundamental situation,” said Mike Holland, a credit analyst at Bloomberg Intelligence. “Its distressed story suggests open capital markets often make a more compelling argument than naysayers. A rolling bond gathers no loss.”

Low rates across the high yield space, along with strong earnings guidance for 2021, have helped Community Health’s bonds recover and make Tuesday’s deal possible, but the company still faces high leverage and thin liquidity, Holland added.

Representatives for the company didn’t immediately respond to a request for comment. Credit Suisse Group AG, which is leading the bond sale, declined to comment.

Healthcare Struggles

Community Health was once known as one of the most distressed companies in the healthcare sector. But the firm has been selling hospitals to raise cash and refinancing debt to improve its balance sheet. In recent months, the bonds have risen after it posted better-than-expected earnings in the second and third quarters.

The company is rated in the riskiest tier of junk debt, CCC+ by S&P Global Ratings and CCC by Fitch Ratings. Moody’s Investors Service upgraded the company by one notch to Caa2 on Tuesday and viewed the new transaction as a credit positive event.

The three ratings agencies gave the new bond deal lower credit grades, at CCC-, CC, and Caa3 by S&P, Fitch and Moody’s, respectively. S&P estimated the recovery value on the new notes at 0% in the hypothetical event of a bankruptcy, citing “risks to the long-term sustainability” of the company’s capital structure.

Leverage, a key measure of debt to earnings, has been high for years thanks to Community Health’s acquisition of rival hospital operator Health Management Associates LLC in 2014, and was 12 times as of Sept. 30, according to a Fitch ratings report released Tuesday. That drops to 8.4 times when considering grants from the CARES Act, Fitch wrote.

The tender is offering 106.5 cents on the dollar for investors who turn in their bonds by 5 p.m. in New York on Feb. 1. The final deadline, with worse terms for participants, is Feb. 16.

The early deadline offer marks a premium compared to where the notes had traded before the tender offer, at 105.5 cents on the dollar on Friday, according to Trace bond pricing data. The notes have since traded up to 106.5 cents.

Community Health Taps Into Junk-Bond Frenzy to Tame Debt

Community Health System’s new notes are expected to be sold as soon as Tuesday, according to people familiar.

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