Tenet Down on Cash Crunch Call

An analyst skeptical on the hospital chain sees big problems ahead.
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(THC) - Get Report

has taken a sudden turn for the worse.

The company's shares plunged Wednesday, sinking below $10 for the first time in years, as investors lost hope in the hospital chain. The dive came one day after investors learned that Tenet has

dwindling liquidity and could be gasping for cash very soon.

"Tight," Fulcrum analyst Sheryl Skolnick noted on Wednesday. "Very tight, in our view."

Skolnick reiterated her sell rating on the stock -- expressing more concern than ever -- a day after Tenet revealed that it had bought some breathing room, at a price, from its lenders. The company negotiated a new credit facility that relaxes the leverage ratios it was on the verge of violating. But it now has access to far less cash as a result.

The banks slashed Tenet's credit line from $1.2 billion to $800 million, with only $500 million available in cash, despite receiving collateral for the loan this time around. Even so, Skolnick called terms of the deal "relatively benign" -- for now. She fully expects Tenet to renegotiate the deal, under less favorable conditions, as early as this year.

"We do not believe that THC can achieve the implied level of

earnings before interest, taxes, depreciation and amortization in 2004," she explained. And "we are not alone in predicting a lower EBITDA level for 2004 than the minimum implied by the credit facility terms."

Still, Skolnick started warning about Tenet ahead of most. For months, she has viewed Tenet as a breakup candidate that's worth less than $10 a share at best. She cranked up her bearish tone on Wednesday.

"We worry that we and others have been so negative on THC's prospects that perhaps the 'bulls' on the story have tuned us out," she conceded. "We hope that isn't the case."

Meanwhile, Skolnick expressed some concern that even she isn't pessimistic enough. She points out that her 2003 EBITDA forecast, while "substantially lower" than company guidance, still wound up too high. In addition, she says, Tenet has been burning through far more cash than she had anticipated. The company, with $425 million of available cash, came up $217 million short of her expectations.

Skolnick describes Tenet as a "wounded company" that's struggling in hostile industry conditions. And she says that "every bit of cash flow is ... more precious" to Tenet than it is to its fellow peers.

Skolnick also suspects that Tenet -- faced with a slew of investigations and lawsuits -- soon could see its condition deteriorate further.

"If the company ends up having to pay fines or settlements in 2004, the cash needs may well exceed available sources of liquidity," she noted. Moreover, she reminded, "There is a track record here of things turning out be much worse than management anticipated."

Tenet was down 12.5% to $10.26, following a brief dip into the single digits, after Skolnick's latest report.