Community Health Systems says balance sheet, covenants 'in good shape'

By Paul Deckelman

New York, Sept. 7 - Community Health Systems Inc. said its balance sheet's vital signs are "in good shape," with no maturities coming up for several years, almost all of its debt at a fixed cost and its ratios of debt to net revenues and debt to EBITDA at manageable levels as the Franklin, Tenn.-based hospital operator uses cash to de-lever.

It also has ample borrowing capacity under its mostly undrawn revolving credit line and other credit facility availability.

In a presentation to investors at the Robert W. Baird & Co. Healthcare Conference on Wednesday in New York, the company's executive vice president and chief financial officer, W. Larry Cash, said that the 133-hospital chain has no debt maturities coming due until 2014, no bonds maturing until 2015 and fixed interest rates on 93% of its debt. The weighted-average interest rate under its credit facility, excluding interest-rate swaps, was 3.2%.

"Our balance sheet is in good shape," Cash declared, adding "our covenants are in good shape."

Debt levels declining

As of the end of the second quarter on June 30, the company's long-term debt stood at $8.78 billion - down from $8.81 billion at the end of fiscal 2010 on Dec. 31, 2010 and $8.84 billion at the end of 2009.

When Community Health purchased Triad Hospitals Inc. in 2007 in a transaction valued at $54 per share, or $6.8 billion total, including the assumption and repayment of $1.7 billion of the Plano, Texas-based hospital operator's existing debt, it sold $3 billion of 8 7/8% senior notes due 2015, which priced on Jun. 27, 2007 at 99.294 to yield 9%.

The financing also included more than $7 billion of credit facility debt: $6.1 billion of term loan debt due in 2014, a $400 million delayed-draw term loan facility also due in 2014 and a $750 million revolver due in 2013. Besides paying for the Triad acquisition, some of the proceeds from the new bond and credit facility financings were used to take out then-existing Community Health debt obligations, including its $300 million of 6½% senior subordinated notes due 2012, which were tendered for in July 2007.

In December 2007, the delayed-draw facility was reduced to $300 million, which was fully drawn as of January 2009.

In November 2010, Community Health and its lenders agreed to amend the term-loan portion of the credit facility, extending the maturity of $1.5 billion of the loan to January 2017 in return for an increase in the pricing, although there is a springing maturity on that portion of the debt that could accelerate the maturity to April 2015 if more than $50 million of the 8 7/8% notes are still outstanding without having been refinanced by then. Terms on the other $4.5 billion of term loan debt, and the June 2014 maturity, were left unchanged.

The company has been making regular amortization payments on the debt since then, reducing the outstanding balance, assisted by its cash generation efforts.

Cash coming in

Cash from operating activities grew from $154 million in 2001 to $350 million in 2006, the last full year before the Triad deal added that company's 54 hospitals to Community Health's then-portfolio of 77 facilities, bringing the company to around its present size. In 2007, the first year revenues from the added hospitals were included after the acquisition closed at mid-year, cash from operating activities grew to $688 million. They then grew to $1.06 billion in 2008, the first full year of combined operations, and to $1.08 billion in 2009 and $1.20 billion in 2010.

For this year, Community Health is projecting full-year cash from operations of between $1.15 billion and $1.25 billion. Through the first half of this year, actual cash has totaled $585 million, up from $542 million for the same time period in 2010.

Community Health proclaims that its de-levering efforts have brought its leverage ratios "well below" their levels of 1996, when the then-public company was acquired by the private equity firm of Forstmann Little & Co. in a $1.1 billion leveraged buyout deal that also included the assumption of $270 million of debt. (The company later went public again in 2000.)

CFO Cash said that since the 1996 transaction, revenues have increased on average at a compound annual growth rate of 24%, while the compound annual growth rate of adjusted EBITDA has been 22% on average since that starting point.

Accordingly, the company's ratio of debt to net revenues fell to 0.5 times by 2006 from 1.6 times in 1996. After the Triad transaction and the borrowings required to complete it, the ratio went back up a little to 0.7 times by 2010, where it remains currently.

At the same time, the ratio of debt to adjusted EBITDA fell from 9.3 times in 1996 to 3.4 times in 2006. It had edged back up to 5.0 times by 2010 but has since come down slightly to the present 4.9 times.

Ample revolver availability

As of the end of the second quarter, the company had cash and cash equivalents of $191.4 million, although this was down from $299 million at the end of 2010. Patient accounts receivable, net of allowances for doubtful accounts, stood at $1.79 billion at June 30, up from $1.71 billion at the end of 2010.

The company had $750 million of availability under its revolver, although $37.9 million was set aside for outstanding letters of credit.

The company also has the ability to amend the credit facility to provide for one or more additional tranches of term loans totaling $1 billion, which it has not yet accessed. It can also borrow up to $2 billion from receivables transactions, although $1.7 billion of that would have to go for the repayment of existing term loans, leaving a net additional capacity of $300 million. That availability has also not been accessed.

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