Fitch Affirms Community Health Systems at 'B'; Outlook Stable.
--Issuer Default Rating (IDR) at 'B';
--Secured Bank Credit Facility at 'BB-/RR2';
--Senior Unsecured Notes at 'CCC+/RR6'.
The Rating Outlook is Stable. The ratings apply to approximately $8.9 billion in debt outstanding as of March 31, 2008.
Community Health Systems' (Community) ratings reflect the company's strained credit statistics as a result of incremental debt used to acquire Triad Hospitals, Inc. (Triad) in the third quarter of 2007 partially offset by the company's strong recent operating performance and rapid realization of acquisition synergies. Community's debt, leverage and cash flows all weakened considerably as a result of incremental debt assumed to complete the acquisition of Triad Hospitals in 3Q07. Leverage (total debt/EBITDA) increased from 2.90 times (x) for the last 12-months (LTM) ended June 30, 2007 to 7.96x for the LTM ended March 31, 2008 while free cash flow was a negative $38.8 million for the LTM ended March 31, 2008. Fitch notes that the LTM leverage and free cash flow figures do not reflect a full year of contribution from the Triad hospitals. Fitch believes Community's credit metrics will improve from current levels over the near term but will remain consistent with a 'B' rating once the acquisition of Triad is annualized in the third quarter.
Community demonstrated strong operating results and realization of acquisition synergies during 1Q08. Community's same store admissions growth (a measure of organic growth) of 3.8% was more than triple the industry average of 1.2%, and the company's highest rate of growth in several years. In addition, same store EBITDA margins expanded as a result of organic growth and cost management. Community is also ahead of schedule in achieving its targeted synergies from the Triad acquisition, with approximately 24% of the $145 million in targeted synergies for 2008 achieved in the first quarter. It appears that Community has been able to manage the Triad integration without significant disruptions to the company's operations. Importantly, no disruptions in physician relations are apparent. Community is on-track with its 2008 physician recruitment target and the rate of physician turnover has remained consistent with historical levels of approximately 6%-7%.
In addition to recent operating strength, Community benefits from a strong liquidity profile. At March 31, 2008, liquidity was provided by approximately $164 million in cash on hand, $715 million in availability on the company's $750 million secured revolving credit facility maturing July 2014, and a $300 million delayed-draw term loan. In addition, the company has the ability to add up to $300 million in borrowing capacity to the credit facility as a result of receivables transactions (including securitizations) and up to $600 million in additional term loan tranches. Community also has a favorable debt maturity profile, with no meaningful maturities until after 2012. Key covenants include maximum leverage (total debt/EBITDA no more than 7.25x through March 2009), minimum coverage (interest/EBITDA at least 1.75x through September 2009), and limitations on liens, capital expenditures, and restricted payments.
Community has used asset divestiture proceeds to reduce debt by approximately $250 million over the past six months. Going forward, however, Fitch believes Community will focus on deleveraging via EBITDA growth and allocate more cash flow to internal investments, including acquisitions. Fitch notes that current industry challenges, including high levels of bad debt expense and low patient volumes, could negatively affect the company's ability to deleverage over the next couple of years. However, Fitch notes Community has the ability to reduce capital expenditures and acquisitions and focus on debt reduction, if necessary, if industry pressures are extreme.