Community Health Systems rating upgraded to ’CCC+’ by S&P Global Ratings

Investing.com -- S&P Global Ratings has upgraded the rating of Community Health (NYSE:CYH) Systems Inc. to ’CCC+’ from ’SD’, while the outlook remains negative. The rating of the senior unsecured notes was also raised to ’CCC-’ from ’D’. Additionally, the company’s proposed $700 million senior secured notes due 2033, issued by subsidiary CHS/Community Health Systems Inc., were assigned a ’B-’ issue-level rating.

The rating upgrade comes as Community Health’s operational performance shows steady improvement. The company has seen an increase in adjusted admissions and net revenue per admission. However, EBITDA margins, despite benefiting from growing patient volumes, lower utilization of contract labor, and easing inflationary pressures, are still affected by an unfavorable acuity mix and higher medical specialist fees.

Adjusted leverage for the company remains high, above 8x, and the company has yet to demonstrate strong sustained positive free cash flows. The negative outlook reflects the risk of more distressed exchanges in the future, despite the possibility of credit metrics improving in 2025.

Community Health’s same-store adjusted admissions increased 2.6%, and revenue per admission was up 0.5%. Despite these improvements, the company continues to face challenges such as higher specialist fees, a weak acuity mix, and elevated patient denials, which continue to pressure adjusted EBITDA margins.

Community Health has recently announced its plan to sell its 80% ownership in Cedar Park Regional Medical (TASE:BLWV) Center in Cedar Park, Texas, to minority partner Ascension Health for $460 million. This sale, expected to close in the second or early third quarter of 2025, is part of the company’s efforts to deleverage, with proceeds from divestitures in 2025 projected to exceed $1 billion.

Despite these efforts, the company’s free cash flow generation remains mixed. Inflationary pressures, especially on labor, and high specialist fees have hindered the company’s ability to improve adjusted EBITDA margins over the past years. Also, the delay in receiving state supplemental program payments has led to near-term weakness in cash flow.

Ratings are limited by the potential for more distressed exchanges in the near term. The company has completed several below-par debt repurchases considered distressed, and there is a high risk that Community Health may complete more such repurchases over the next 12 months.

The negative outlook reflects the possibility that Community Health may pursue further debt repurchases at below par that would be deemed a distressed exchange. The company’s adjusted leverage remains high at 8.1x, and it has not sustainably generated free cash flow in the past couple of years.

The ratings on Community Health could be lowered if the company conducted further debt repurchases deemed distressed. Conversely, the outlook could be revised to stable if Community Health demonstrated it could sustainably generate positive discretionary cash flow and there were fewer potentials for a distressed exchange.

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