Tenet Tanks on Bad-Debt Blow - TheStreet

Tenet Tanks on Bad-Debt Blow

The stock plunges 13% after the company joins rivals in taking a big charge.
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It's looking like


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could use some intensive care itself.

Crippled already by unique problems of its own, the giant hospital chain must now contend with painful ailments ravaging the rest of the industry. The company -- once among the most profitable in the sector -- is now treating so many uninsured patients that it's struggling to make ends meet.

Like many of its peers, including industry leader


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, Tenet has found itself taking big charges to cover mounting bad-debt expenses. But for Tenet, whose profit growth evaporated with a Medicare loophole, the blow is particularly painful.

The company will now miss both third-quarter and full-year earnings targets. It can no longer offer future earnings guidance. It has likely tripped a bank covenant. And it has just $200 million in cash -- or less than four times what it paid to settle allegations at a single Tenet facility -- at a time when the entire company faces a slew of patient lawsuits and government investigations.

"The sharp escalation in ... recent trends makes it very difficult to forecast future bad debt expense and financial performance in general," Tenet announced Wednesday. "Given the number of factors, both industry-wide and company-specific, that are now impacting the company's business, management is discontinuing guidance at this time."

Prior to Wednesday's announcement, Wall Street had expected Tenet to deliver third-quarter profit of 20 cents a share and full-year profit of 80 cents to $1 a share for the 12 months ending June 30. But the company plans to take a big third-quarter charge -- totaling up to $225 million -- to cover rocketing bad-debt expenses. And it has warned that this charge may not be the last.

"We are taking immediate action to manage and mitigate the steep increase in bad debt," CEO Trevor Fetter said. "Despite these actions, we expect future earnings to be impacted by this trend."

Already, the fresh problems have taken a heavy toll on the company. Tenet stated Wednesday that it has probably violated a covenant requiring the company to maintain a leverage ratio of no more than 2.5 times on a $1.5 billion credit facility. Although the credit line is currently untapped, it is being used to support $200 million in letters of credit at a time when Tenet itself has only $200 million in the bank.

Nevertheless, the company pledged to work through the ordeal.

"Historically, Tenet has had very strong relationships with its key banks," said CFO Stephen Farber. "We expect to work productively with them to resolve this issue."

But investors could not be calmed. Tenet's stock -- already hammered from $50 last year -- tumbled 13.4% to $13.34 in early trading Wednesday.