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Turnaround in Doubt: S&P Downgrades CHS Credit Rating, Citing Weak Cash Flow

By Steven Porter  
   March 15, 2018

The hospital operator hired financial advisers this week and saw stock prices slump as investors assess the impact of its $2 billion loss in 2017’s fourth quarter.

S&P Global Ratings lowered its corporate credit rating Wednesday for Community Health Systems (CHS), citing concerns over the Franklin, Tennessee–based company’s liquidity.

The hospital operator last month reported a $2 billion loss for the fourth quarter of 2017, or nearly $18 per share. Although the company’s revenue results were within expectations, its cash flow was “much weaker” than S&P had anticipated.

Related: CHS Records $2B Loss in 4Q

“The downgrade reflects weaker-than-expected free cash flow guidance for 2018 and the company's high debt burden, which we believe could make it difficult for the company to refinance its upcoming 2019 debt maturities,” S&P said in a statement.

“The cash flow shortfall relative to our expectations was partly due to higher-than-expected labor costs and recent underperformance of hospitals being divested.”

S&P made several changes to its CHS ratings:

  • Corporate credit rating downgraded from “B-” to “CCC+” with a negative outlook;
  • Secured debt downgraded from “B+” to “B-” with recovery rating revised from “1” to “2” (as a result of significant downsizing); and
  • Unsecured debt downgraded from “CCC” to “CCC-” with recovery rating remaining at “6” (indicating that lenders should expect to recover next-to-nothing if CHS defaults)

Share prices for CHS—which had already fallen dramatically from their peak above $52 in 2015—drooped even further this week. They closed Wednesday at $4.43 per share, after slipping more than 28% from their close at $6.18 on February 27, when CHS announced its fourth-quarter earnings.

But share prices were up more than 5% in mid-morning trading Thursday.

Steven Porter is an associate content manager and Strategy editor for HealthLeaders, a Simplify Compliance brand.

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