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Analysis

Moody's Calls CHS' Proposed Debt Exchange 'Untenable'

By Jack O'Brien  
   November 04, 2019

The ratings agency's comment came days after the Franklin, Tennessee-based for-profit hospital operator released its Q3 earnings report.

Moody's Investors Service stated Monday that Community Health Systems' (CHS) proposed debt exchange fixes short-term liquidity concerns but adds to an "untenable" capital structure.

Moody's did not change CHS' Caa3 rating in its public comment but noted that the proposed changes do not alleviate concerns about an "already unsustainable capital structure."

The ratings agency's comment came days after the Franklin, Tennessee-based for-profit hospital operator released its Q3 earnings report, where the company reported that it cut its net loss by more than $300 million year-over-year.

Related: CHS Slashes Net Loss by $308M Year-Over-Year

CHS' proposed plan would exchange a combination of $700 million aggregate principal amount of its 8% senior secured notes due in 2027 and up to $1.9 billion aggregate principal amount of its 6.875% senior unsecured notes due in 2028 for $2.6 billion aggregate principal amount of outstanding 6.875% senior unsecured notes due in 2022.

Moody's commented that this exchange would "likely result in downward pressure" on existing senior secured first lien ratings of Caa1 and the ratings agency stated that the move would likely be considered a "distressed exchange."

This would likely lead to Moody's appending the probability of default for CHS to "limited default."

"At that time, there may be improvement in the Speculative Grade Liquidity Rating (currently SGL-4, indicating weak liquidity), reflecting reduced covenant risk, increased availability on the ABL revolver and extension of debt maturities," Moody's said.

Related: Moody's Outlook Darkens for Team Health

Hours after Moody's commented on CHS' debt exchange, the provider announced that it was commencing with an offer to issue an additional $500 million worth of aggregate principal amount on its outstanding 8% senior secure notes due in 2026, according to a filing with the Securities and Exchange Commission (SEC).

CHS plans on using its net proceeds to redeem $121 million aggregate principal amount of its outstanding 7.125% senior unsecured notes due in 2020, repay amounts outstanding under its current cash-flow including cash-collateralizing nearly $145 million in outstanding letters of credit, and repay borrowings outstanding under its asset-based loan facility.

CHS expects to have $2.1 billion aggregate principal amount of outstanding 8% senior secured notes due in 2026 following the offering.

Editor's note: This story has been updated to include CHS' most recent filing with the SEC.

Jack O'Brien is the finance editor at HealthLeaders, a Simplify Compliance brand.


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