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January 20, 2021 03:08 PM

CHS' $1.8 billion bond offering another notch in slow turnaround

Tara Bannow
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    Modern Healthcare Illustration / Getty Images

    Community Health Systems' $1.8 billion high-yield bond offering—its second drive-by transaction in as many months—signals a gradual rebound for the hospital chain.

    Franklin, Tenn.-based CHS both launched and priced the offering in a single day, a move known as a drive-by on the junk bond market, just as it did in December. The junior priority secured notes due 2029 garnered a CC rating from Fitch Ratings.

    The low rating indicates a very high credit risk, but the transaction aligns with Fitch's prediction in November that CHS is on the upswing from its purchase of Health Management Associates in 2014.

    "It's definitely positive in that it's going to extend their debt maturity profile and lower interest expense," said Megan Neuburger, a managing director with Fitch Ratings who covers investor-owned healthcare companies like CHS.

    CHS originally capped the Jan. 19 offering at $750 million, but tacked on an extra $1 billion later in the day due to strong investor demand. The proceeds of the 2029 notes will be used to pay off CHS' junior-priority secured notes due 2023.

    It's not uncommon in the healthcare industry to see quick transactions like this one, Neuburger said.

    The bond markets performed fairly well despite the COVID-19 pandemic, especially for healthcare issuers, Neuburger said. Liquidity remained high thanks in large part to advanced Medicare payments under the Coronavirus Aid, Relief, and Economic Security Act.

    "There certainly has been a good demand for high-yield healthcare bonds," Neuburger said.

    The 2014 HMA deal saddled CHS with an enormous debt burden, Medicaid reimbursement issues and a portfolio of underperforming hospitals. The company has since aggressively divested hospitals. Its debt stood at $12.8 billion as of Sept. 30, 2020, and Fitch noted it has paid down more than $3 billion in debt since the beginning of 2016 through its Quorum Health spinoff and other hospital sales.

    Fitch's overall rating on CHS' debt profile is CCC—substantial credit risk—with a positive outlook. Neuburger cautioned leverage is still very high and CHS will need to grow its earnings to improve its balance sheet. Fitch predicts CHS' earnings before interest, taxes, depreciation and amortization to reach $1.5 billion in 2021, accounting for hospital divestitures and those under agreements to be sold.

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