Market Overview

Community Health's Credit Ratings Downgraded By Moody's


Credit rating giant Moody's Investors Service recently downgraded the ratings of Community Health Systems (NYSE: CYH). The ratings include Corporate Family Rating, which were lowered to Caa2 from Caa1 and the Probability of Default Rating (PDR), which deteriorated to Caa2-PD/LD from Caa1-PD. The ratings outlook remains stable.

The above was based on the company's announcement of the final results of its debt exchange wherein holders exchanged part of unsecured notes due 2019, 2020 and 2022 for new junior lien notes due 2023 and 2024. The credit rating agency considered this transaction a distressed exchange, in other words, a default according to them. Moreover, Moody's appended the PDR with an "/LD", indicating a limited default. However, it will be removed after three business days.

The transaction largely addresses the company's 2019 and 2020 notes maturities. The agency expects that Community Health will seek to amend or extend the maturity of its Term Loan G in the upcoming weeks. If the Term Loan G is successful, then the next significant debt maturity will be due Jan, 2021.

Although the progress in extending maturities exists, the downgrade of the CFR and PDR ratings indicates the agency's prediction of weakening interest coverage, cash flow and liquidity. It forecasts that the negative free cash flow over the next 12 to 18 months and interest coverage (EBITDA-capex/interest) to stay below 1.0x. A Caa3 rating was also assigned to the new secured junior lien notes due 2023 and 2024 by Moody's. Additionally, the ratings on the remaining unsecured notes due 2019, 2020 and 2022 from Caa2, reflects the subordination to the new junior lien debt.

The credit rating body has also downgraded the rating on the first lien secured debt from B2 to B3. The Speculative Grade Liquidity Rating was affirmed as SGL-3.

Ratings Rationale

Caa2 Corporate Family Rating indicates the agency's expectation that the company will continue its operation with high financial leverage over 8.0x. The rating agency also anticipates negative free cash flow over the next 12 to 18 months because of the company's significant capital requirements and high interest costs.

Another concerning factor is the industry-wide operating headwinds which would limit operational improvement despite Community Health's turnaround initiatives. The ratings have been supported by the company's large scale, demographic diversity and divestiture plans.

The proceeds would be used for repaying the debt of the company.

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The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: contributor contributorsNews Health Care General


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