Moody's Changes Outlook on Community Health Systems (CYH) to Negative; SGL Rating Lowered

November 21, 2016 2:35 PM EST

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Moody's Investors Service, ("Moody's") changed CHS/Community Health Systems, Inc.'s (NYSE: CYH) rating outlook to negative from developing. Moody's also downgraded Community's Speculative Grade Liquidity rating to SGL-3 from SGL-2. Moody's affirmed Community's Corporate Family and Probability of Default Ratings at B2 and B2-PD, respectively. The Ba3 ratings on the company's senior secured bank debt and senior secured bonds and Caa1 rating on its unsecured notes were also affirmed.

"The change in Community's rating outlook to negative reflects our expectation that difficulties in improving operating results will result in debt to EBITDA remaining well above 6.0 times," stated Dean Diaz, Moody's Senior Vice President. "While the company has reiterated its plan to divest facilities and is exploring strategic alternatives, declining EBITDA and the significant amount of outstanding debt will make it increasingly difficult to meaningfully improve credit metrics through these means," continued Diaz.

The downgrade of Community's Speculative Grade Liquidity rating to SGL-3 reflects Moody's expectation that Community's liquidity will weaken, but remain adequate. Moody's anticipates that the decline in profitability will reduce available free cash flow and reduce headroom in complying with financial covenants.

The affirmation of Community's B2 Corporate Family Rating reflects Moody's expectation that the company will have difficulty reducing leverage. However, the application of asset sale proceeds to debt repayment and recent actions to reduce costs and address weak volumes should impede further deterioration in financial metrics.

Following is a summary of Moody's rating actions.

Ratings downgraded:

Speculative Grade Liquidity Rating to SGL-3 from SGL-2

Ratings affirmed:

Corporate Family Rating at B2

Probability of Default Rating at B2-PD

Senior secured bank credit facilities at Ba3 (LGD 2)

Senior secured notes at Ba3 (LGD 2)

Senior unsecured notes at Caa1 (LGD 5)

The rating outlook was revised to negative from developing.


Community's B2 Corporate Family Rating reflects Moody's expectation that the company will continue to operate with very high financial leverage over the next 12 to 18 months as ongoing operational initiatives have failed to mitigate the impact of negative operating trends. Further, while planned asset sales will allow the company to repay debt, the impact on leverage will be limited given the significant amount of debt outstanding and the foregone EBITDA of those divested operations. Supporting the rating is Community's large scale and strong market presence. Scale remains significant even after the spin-off of 38 facilities and a hospital management business into Quorum Health Corporation and other planned divestitures.

If the company's liquidity weakens, either because of operational shortfalls or adverse developments related to ongoing investigations, or if compliance with covenants becomes less certain, Moody's could downgrade the ratings. Further, if the company fails to address refinancing needs well in advance of upcoming maturities, the ratings could be downgraded. Ratings could also be downgraded if there is further earnings deterioration, or if Moody's does not expect Community's debt to EBITDA to decline closer to 6.0 times.

Moody's could upgrade the ratings if operational initiatives result in volume growth that remains on par with the peer group. Community will also have to strengthen its liquidity and reduce and sustain debt to EBITDA below 5.0 times prior to a ratings upgrade. Finally, Moody's would have to gain additional certainty around the path the company is pursuing with respect to its review of strategic options.

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