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Last week, Modern Healthcare affirmed its concerns about Lutheran Health Network owner Community Health Systems (CHS) in an article entitled “CHS to sell Dade City hospital to Adventist Health”…/chs-to-sell-dade-city-hos….

As the title suggests, the story documents CHS’s sale of a 120-bed hospital in Dade City, Florida to Adventist Health System–a planned divestiture expected to close in the first quarter of 2018, pending regulatory approval and closing conditions. This follows CHS’s initial round of 30 hospital sales, completed in November, using what was stated as about $2 billion to pay down $14 billion in debt. The Adventist sale is part of a second round of sales projected to sell hospitals worth $1.5 billion in revenue.

The Modern Healthcare story continues, however, by casting doubts on CHS’s long-term viability: “Analysts were skeptical that the organization could raise enough cash through asset sales to address its debt maturities and term loan G due in 2019. ‘Even if they do this round of divestitures, there is not enough liquidity,’ said Sheryl Skolnick, director of research covering healthcare equities for Mizuho Securities. ‘They would have to do some restructuring.’”

The Progression:
– In September, Moody’s downgraded CHS’s Corporate Family Rating and Probability of Default Rating to B3 from B2
– In November, CHS announced negotiations with a group of bondholders led by Franklin Resources, Inc. to extend nearly $2 billion in bonds coming due in 2019
– In early December, the Lincolnian News reported that CYH (CHS’s ticker symbol) bonds fell 2.5% of their face value during trading Thursday and are now trading at $77 vs. $78.50 a week ago
– Contrarily over the last four months, several large institutions have bought CYH equity. Nearly 95% of stock is owned by institutional investors such as JP Morgan Chase, Vanguard Group, and Royce & Associates. As reported earlier Tianqiao Chen, the largest shareholder, has purchased more stock.
– On December 11, this from Stock News Times: “As of October 31st, there was short interest totaling 29,543,283 shares, an increase of 12.2% from the October 13th total of 26,328,315 shares. Based on an average trading volume of 3,296,026 shares, the short-interest ratio is presently 9.0 days. Currently, 26.9% of the shares of the stock are sold short.”
– On the same day, financial analysts seem guarded. MarketBeat analysts’ consensus shows 5 Sell Ratings, 13 Hold Ratings and 1 Buy Rating with a Consensus Price Target of $6.57–well above the current price. One should note that the Consensus Price Target has erred on the high side for the past year.

In short, debt is a cruel master. This begs a few questions: Will bondholders negotiate refinancing that is affordable? Will earnings be sufficient to operate the remaining hospitals and support company plans? A great deal will depend on admissions volumes in CHS hospitals this quarter and next.

To put things into perspective, Becker’s Hospital Report shows that during the week of December 4, three of the five major for-profit hospital operators saw their stock prices rise.
– HCA Healthcare: $84.84 per share (up 1 percent)
– LifePoint Health: $46.70 per share (up 0.8 percent)
– Tenet Healthcare: $13.32 per share (down 1.3 percent)
– Universal Health Services: $111.56 per share (up 3.2 percent)
– Community Health Systems (Franklin, Tenn.): $4.28 per share (down 1.8 percent)