Credit rating giant Moody’s Investors Service recently downgraded the ratings of Community Health Systems (CYH - Free Report) . The ratings include Corporate Family Rating (CFR), 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.
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.
Future Rating Action
Moody’s can downgrade the ratings provided there is deterioration in the company’s earnings, declines in liquidity or a rising risk of payment failure or wearing off credit recovery potential.
The agency could upgrade the ratings if operational initiatives result in better volume growth as well as margin expansion. Also, declining leverage or improving free cash flow by dint of which, Community Health’s ability to refinance future debt maturities along with sustaining the current capital structure might lead to rating upgrade.
Shares of this Zacks Rank #3 (Hold) company have rallied 13.38% quarter to date, outperforming its industry’s growth of 7.73%.
Stocks to Consider
Investors interested in the medical industry might take a look at a few better-ranked stocks, namely WellCare Health Plans, Inc. (WCG - Free Report) , Anthem, Inc. (ANTM - Free Report) and Humana Inc. (HUM - Free Report) .
WellCare offers managed care services for government-sponsored health care programs. The stock sports a Zacks Rank #1 (Strong Buy) and delivered an average four-quarter positive surprise of 51.70%. You can see the complete list of today’s Zacks #1 Rank stocks here.
Anthem and its subsidiaries operate as a health benefits company in the United States. With a Zacks Rank #2 (Buy), the stock came up with an average four-quarter beat of 7.22%.
Humana operates as a health and well-being company in the United States. The company carries a Zacks Rank of 2 and pulled off an average four-quarter positive earnings surprise of 6.16%.
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