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

News  |  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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