FRANKLIN, Tenn. — S&P Global Ratings lowered the corporate credit rating on Community Health Systems Inc. to a ‘B’ and revised the rating outlook to negative from stable.
S&P Global’s action follows CHS’s pre-announcement last week of very weak third-quarter operating results, characterized by declining margins and weakening adjusted admissions trends, even when compared to a disappointing prior year third quarter, S&P Global Ratings credit analyst Shannan Murphy told the website StreetInsider.com.
Community Health Systems is the parent company of Medical Center of South Arkansas in El Dorado.
CHS owns a number of Arkansas healthcare facilities besides MCSA, including Northwest Health Physicians’ Specialty Hospital in Fayetteville; Northwest Medical Center – Bentonville; Northwest Medical Center – Springdale; Siloam Springs Regional Hospital; Sparks Medical Center — Van Buren; Sparks Regional Medical Center Fort Smith and Willow Creek Women’s Hospital in Johnson.
CHS also recently announced that it is reviewing strategic alternatives, and is speaking to a number of parties, including financial sponsors, who may be interested in purchasing all or a portion of the company’s assets, according to Murphy.
“While we continue to believe that the company can address some of its capital structure issues through cost cutting and planned and pending asset sales, we believe that there is a meaningful risk that the company is unable to execute on these plans,” Murphy said.
S&P Global’s negative rating outlook on Community reflects the firm’s view that credit risk has escalated over the past few months, reflecting both Community’s operating issues and its strategic review process.
“Based on recent trends, we believe that Community is likely to generate only marginally positive free cash flow over the next several quarters, and debt leverage is likely to be sustained near 7x,” Murphy said.
“However, we recognize that the company plans to address at least some of its capital structure issues through cost restructuring and planned and pending asset sales, though we now see execution risk associated with this strategy as higher given recent operating performance.”
Murphy said S&P Global could lower the rating if Community is unable to stabilize its operations and generate at least $100 million to $200 million in positive recurring cash flow.
“We could also lower the rating if we believe the company will be unable to address its covenant issues (either through improving its operating performance or getting an amendment) such that it can continue to access its revolver, given working capital swings inherent in the business.”
According to an Oct. 26 news release from CHS, the company anticipates net operating revenues for the 2016 third quarter will be approximately $4.380 billion, compared with $4.846 billion for the same period in 2015.
Income from continuing operations before income taxes as reported for the three months ended September 30, is expected to be a loss of approximately $83 million, compared with income from continuing operations before income taxes of $121 million for the three months ended September 30, 2015.
According to the news release, common stockholders can expect a loss of $(0.69) per share (diluted), based on the third quarter results, compared with income from continuing operations of $0.51 per share (diluted) for the three months ended September 30, 2015.
“As is always our highest priority, Medical Center of South Arkansas is continuing in our work to provide our patients with quality, personalized care close to home,” said Catherine Noyes, MCSA’s Director of Marketing, in an email on Tuesday. “We are particularly proud of our excellence in emergency cardiac treatments where timely access to care can save lives. We offer the only accredited Chest Pain Center in southern Arkansas, a full cardiology department including interventional cardiologists and an open heart surgeon. We continue to expand our service lines to meet the needs of our community, this year welcoming urologist Dr. Samuel Houston and ear, nose and throat specialist Dr. Sharon M. Tomaski to the MCSA medical staff. Our work is ongoing and we appreciate the opportunity to care for and serve our community.”