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  Title	Fitch Affirms IDR for Community Health Systems at 'CCC+'
  ID	4832280
  External ID	7369416968
  Author	Unknown
  Published Date	Dec. 6, 2024, 3:18 p.m.
  Summary	Fitch Ratings - New York - 06 Dec 2024: Fitch Ratings has affirmed the 'CCC+' Issuer Default Ratings (IDRs) for Community Health Systems, Inc. (CYH) and its subsidiary CHS/Community Health Systems, In
  Tags	None
  URL	https://www.fitchratings.com/research/corporate-finance/fitch-affirms-idr-for-community-health-systems-at-ccc-06-12-2024
  Sentiment	Negative: 0.11160    Neutral: 0.03614    Positive: 0.85226
  Relevance	0.02165

• Content Details

  Content ID	2901712
  Key	f4abc9e0-16a0-4318-b2d1-ece936e51d4a
  Content	Fitch Ratings - New York - 06 Dec 2024: Fitch Ratings has affirmed the 'CCC+' Issuer Default Ratings (IDRs) for Community Health Systems, Inc. (CYH) and its subsidiary CHS/Community Health Systems, Inc. (CHS). The affirmation reflects recent results in line with Fitch's expectations, including EBITDA leverage above 8.0x and negative FCF. Fitch expects mid-single-digit EBITDA growth in 2024 (excluding dispositions), which is positive for CHS but less robust than growth at its peers. Despite recent positive operating trends, CHS may not be growing into its capital structure quickly enough before its junior debt matures, sustaining risk of distressed debt exchanges or debt refinancings at higher rates that could strain FCF. While Fitch expects Medicaid reimbursement increases, further divestitures, and organic EBITDA growth to reduce EBITDA leverage below the 8.0x positive rating sensitivity by 2025-2026, evidence of sustained deleveraging and a transition to consistently positive FCF is also needed to support positive rating action. Key Rating Drivers Leverage High But Improving: Fitch expects CHS's EBITDA leverage to decrease to 7.0x-7.5x in 2025-2026, which would be below the 8.0x positive rating sensitivity. Deleveraging progress during this period will be a key factor in how CHS can address its $2.5 billion of first-lien notes due in 2027, $0.6 billion of senior unsecured notes due in 2028 and $2.5 billion of second-lien notes due in 2029-2030. For context, and consistent with its 'CCC+' IDR, CHS has maintained EBITDA leverage over 8.5x with negative FCF for the past two years, despite materially improved industry conditions. Fitch expects deleveraging to be driven by rising reimbursement rates (Medicare, managed care and Medicaid) and rising volumes supporting top-line growth and moderate margin expansion. Elevated leverage still poses the risk of distressed debt exchanges or refinancings at higher rates that pressure FCF, especially if capital market conditions deteriorate. Fitch's leverage projections for 2026 could be adversely affected if Congress fails to extend, or significantly reduces, the enhanced subsidies for buyers of Affordable Care Act exchange health plans, which are otherwise scheduled to expire at YE 2025. FCF Below Expectations: Fitch expects CHS to return to positive FCF in 2025-2026 but only modestly at 0%-1% of revenue. Despite capex at only 3% of revenue, Fitch expects CFO-Capex at only 0%-1% of debt in 2025-2026, consistent with the 'CCC+' IDR. That said, Fitch expects divestitures to augment the extent to which FCF alone could drive debt reduction, likely improving its ability to maintain access to debt capital markets. The sustainability of positive FCF with growth, rather than moderate deleveraging alone, will be a key factor in CHS potentially generating positive rating momentum. For context, our cash flow projections above compare with CHS likely generating negative FCF for 2024, despite labor costs moderating and volumes rising significantly. By comparison, CHS's closest peers have recently been generating appreciable FCF, despite capex levels running well above lower levels at CHS, which may have implications for CHS growing into its highly leveraged capital structure. Profitability in Flux : Fitch expects EBITDA margins to improve to about 13.0% in 2025-2026, up from labor-inflation lows of 10.4% in 2022 and from about 12.0% expected in 2024. Our forecast assumes upside to pricing (including increases in Medicaid reimbursement) will be partially offset by labor cost inflation and by elevated other operating costs amid rising medical specialist expense. While likely EBITDA margin improvement in 2024 is positive, it is well below peers amid rebounding volumes and normalizing temporary staffing costs. If CHS exceeds our margin estimates, further deleveraging is likely. Derivation Summary CHS's 'CCC+' IDR reflects leverage easily exceeding that of its closest peers: Tenet Healthcare (THC; B+/Positive); Universal Health Services (UHS; BB+/Stable); and HCA Healthcare (HCA). With EBITDA leverage likely over 8.5x at YE 2024 and 7.0-7.5x in 2025-2026, CHS debt entails higher risk of distressed debt exchanges, with the refinancing of debt due in 2027 potentially requiring access to favorable capital markets and lower interest rates. CHS has a weaker operating profile than its closest peers, with assets located in smaller urban, suburban or non-urban markets with growth prospects Fitch believes are less robust. Its margins should improve further in the near term with continuing volume growth and reimbursement increasing above cost inflation. Fitch sees CHS focusing on optimizing operating costs and reducing debt via divestitures. The 'CCC+' IDR also reflects financial flexibility that is more constrained than that of its higher-rated peers. This includes lower interest coverage, reflecting the burden of its highly-leveraged capital structure, and shortfalls in generating FCF, especially relative to the considerable FCF generated by its closest peers, despite volumes rising and labor costs moderating in 2023-2024. The IDRs of borrower CHS and parent CYH are identical due to their strong legal and operational ties. Under its Parent and Rating Subsidiary Linkage Criteria, Fitch applies the weak parent/strong subsidiary approach, as the only asset of CYH is its 100% ownership of CHS, which indirectly owns all operating subsidiaries. Fitch believes legal ring-fencing, access and control are open and thus assesses these entities on a consolidated basis. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer Include -- Revenue growth of 5% in 2025, excluding divestitures, then 4% thereafter, driven by an even split of volume growth and mix-adjusted pricing upside; -- EBITDA margin (before NCI distributions) improving to 13.0% in 2025, and then essentially flat thereafter, reflecting the upside of potential Medicaid supplemental payment program approvals and strong organic growth in 2025, and thereafter the benefit of modest top-line growth and cost optimization efforts, offset by labor cost inflation and ongoing increases in medical specialist expense; -- Negative FCF in 2024 turning modestly positive in the range of 0%-1% of revenue thereafter, with capex at $375 million in 2024, then at $400 million or about 3% of revenue over the rest of the forecast; -- EBITDA leverage (after NCI distributions) of 8.7x at YE 2024, declining to 7.4x by YE 2025, 7.1x by YE 2026 and 6.9x by YE 2027; -- Debt repayment of about $650 million in 2025 (a majority to repay revolver borrowings) using proceeds of divestitures, with only immaterial debt repayment thereafter; and -- SOFR declining to 4.5% in 2025, 4.00% in 2026 and 3.75% thereafter. Refinancing of 2027 first lien senior secured debt in 2026 with a coupon of 10.00%. Recovery Analysis Fitch estimates an enterprise value (EV) for CHS on a post-reorganization going-concern (GC) basis of $8.2 billion, which is based on the product of GC EBITDA (deducts distributions to NCI) of $1.3 billion and a 7.0x EV/EBITDA multiple, less 10% for administrative claims. The multiple reflects a history of acquisition multiples for large hospital operators with business profiles similar to CHS of 7.0x-10.0x since 2006 and the average public trading multiple (EV/EBITDA) of its peer group (HCA, UHS and THC), which has ranged from 6.5x to 9.5x since 2011. The $1.3 billion GC EBITDA assumption reflects a reduction from Fitch's previous $1.4 billion GC EBITDA assumption to reflect divestitures of a significant number of EBITDA-positive hospitals since the latter figure was first established (about 10% of CHS hospitals in the past year). GC EBITDA of $1.3 billion is also in line with Fitch's 2024 EBITDA estimate of $1.3 billion (again, net of NCI distributions) and further below Fitch's 2025 and 2026 estimates in the area of $1.5 billion. Fitch's GC EBITDA estimate further reflects its view that current EBITDA levels, were they to persist, could portend a restructuring. No further reduction to GC EBITDA or debt claims was assumed despite Fitch's expectation that at least one pending divestiture may be completed in the near term with proceeds used to reduce debt, as sensitivity testing revealed that notching would remain unchanged. Fitch's GC EBITDA estimate also reflects attributes of the acute care hospital sector, including the high share of revenue generated by government payors (30%-40%) posing risk of adverse regulatory changes, the legal obligation to treat uninsured patients creating a potentially material unfunded mandate, and the highly-regulated nature of the acute care hospital industry generally. Fitch's recovery analysis assumes that $780 million would be drawn on the $1.0 billion ABL revolver prior to a restructuring scenario. The $780 million figure references last reported availability of $438 million, net of current borrowings of $372 million and outstanding LCs of $66 million as of Sept. 30, 2024, implying that about $125 million of the $1.0 billion revolver is unavailable. Fitch further assumes that the last $95 million of revolver availability is likely to be inaccessible in the period preceding a restructuring due to CHS's likely inability then to comply with a related fixed charge covenant. Fitch thus allocates the distributable EV of $8.2 billion first to the $780 million ABL revolver claim, which recovers on its claim in full, with the remaining distributable EV of $7.4 billion providing a $7.3 billion recovery to the first lien bonds ($7.9 billion as of Sept. 30, 2024) and a $0.1 billion recovery to the second lien bonds ($2.5 billion as of Sept. 30, 2024), the latter purely on account of a 1% concession payment to which Fitch assumes first lien bondholders would likely consent to promote expediency. These recovery assumptions cumulatively result in recovery rates for the company's super-priority ABL revolver and first lien senior secured notes within the 'RR1' range of 91%-100%, which generates a three-notch uplift from the IDR to their debt instrument ratings of 'B+'/'RR1'. The company's second lien senior secured notes, per Fitch's assumptions, recover in the 'RR6' range of 0%-10%, and are thus notched down two levels to 'CCC-'/'RR6'. The senior unsecured notes, which also recover in the 'RR6' range of 0%-10%, however, are notched down three levels to 'CC'/'RR6, to further reflect their structural subordination relative to the higher-ranking second lien senior secured notes. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade -- An expectation for a near-term distressed debt exchange (as defined by Fitch) or that a default, bankruptcy or restructuring is increasingly likely as CHS's nearest-term debt maturity approaches; -- Accelerating negative CFO-capex/debt. Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade -- An expectation for Fitch-defined EBITDA leverage sustained at 8.0x or below; -- CFO-capex/debt turning positive, sustained at levels above 1.5%. Liquidity and Debt Structure Liquidity as of Sept. 30, 2024 was nearly $0.5 billion, including $33 million in cash and $438 million of availability (reflects $372 million drawn and $66 million in outstanding LCs) under CHS's $1.0 billion asset-based revolver due June 2029 (favorably extended from November 2026). Liquidity should benefit from a pending sale of two Shorepoint hospitals in Florida for $265 million and $80 million of potential deferred consideration from the sale of its Tennova Cleveland hospital in Tennessee. On the other hand, Fitch expects the last $95 million of revolver availability is unlikely to be accessible in a period preceding a restructuring due to CHS's likely inability then to comply with a related fixed charge covenant. Fitch views this level of liquidity as satisfactory to withstand foreseeable stresses through 2026, but addressing $2.5 billion of first-lien senior secured notes due in 2027, its next maturity, may depend on favorable capital markets conditions for a refinancing. The ABL revolver has no financial maintenance covenants save for a fixed charge coverage test if availability under the revolver falls below $95 million. Issuer Profile CHS is one of the largest for-profit operators of U.S. acute care hospitals by revenue, with over 1,000 sites of care in 39 distinct markets in 15 states, including 70 affiliated hospitals with over 11,000 beds. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations Community Health Systems, Inc. has an ESG Relevance Score of '4' for Exposure to Social Impacts due to societal and regulatory pressures to constrain growth in healthcare spending in the U.S., which has a negative impact on the credit profile and is relevant to the ratings in conjunction with other factors. The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores Additional information is available on www.fitchratings.com PARTICIPATION STATUS The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 ADDITIONAL DISCLOSURES ENDORSEMENT STATUS
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  Publisher Name	Fitch Rating (#3235)
  Publisher URL	https://www.fitchratings.com
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  Trust Flow Score	33
  Citation Flow Score	46

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  Data Source Name	Quantexa News (#5)
  Data Source Type	news
  Data Source URL	https://app.aylien.com/dashboard
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