Community Health Inks Favorable Terms on M&A Debt

NEW YORK (The Deal) -- Community Health Systems (CYH) may close its $7.6 billion acquisition of Health Management Associates, (HMA) but with the uncertainties of a new healthcare law and the merger partners' own legal problems, it needed good timing to put reasonable financing in place.

The financing saga is also an example of what can happen when companies, even those with issues, can still rely on strong sector indicators.

Franklin, Tenn.-based Community Health is lining up $10.5 billion in loans and bonds to pay for the acquisition and to refinance existing debt, as it waits for the last word from the Federal Trade Commission's ruling on the merger. The agency has asked for a second request on the merger, but while the FTC may require some divestitures, the deal is on track to close by the end of January.

"Creditors like the hospital sector because it's steady," said John Ransom, an analyst at Raymond James Financial Inc. "But this is a tough credit."

But Community Health couldn't have timed its visit to the market much better. High-yield bonds are at their lowest yields since May, according to Bloomberg data. This allowed the company to ink $4 billion in notes with $1 billion in 7.5-year secured notes at 5.125% and $3 billion of eight-year unsecured notes at 6.875%. It also encouraged the company to shift over a portion of the secured bonds to the loans, which provides more financial flexibility. The loans are slated to wrap up Friday.

The company originally set price talk on $4.625 billion of loans at Libor plus 375. That included a new $2.925 billion loan due in 2021 and the extension of $1.7 billion of existing loans to 2021 from 2017, as well as amending additional debt due in 2017. It is also arranging a $1 billion five-year term loan and a $1 billion five-year revolver with talk of Libor plus 250.

Investor demand allowed the company to end up cutting price talk on the seven-year loans to Libor plus 325, which is about in line with previous financing, something that didn't look like it would happen originally.

The original terms that looked as though investors would demand higher rates were due, in part, to financials. Ransom said that when you look at Community Health's numbers, you could argue that it's a minimal and almost nonexistent cash-flow generator.

Net income for the first nine months of 2013 was $165 million versus $260 million in 2012, according to the company's third-quarter earnings report, while adjusted Ebitda for the same time period was $1.28 billion compared with $1.50 billion for the same period in 2012, representing a 14.2% decrease. The numbers are not trending in the right direction either. On Jan. 6, the company said it expects to see admissions on a same-store basis decrease by 7.2% in 2013 compared to 2012.

"If those had been a retailer, we'd be talking about J.C. Penney," Ransom said.

However, investors are looking at a change in the healthcare systems as a catalyst, he said. Moody's Investors Service said it anticipates the company will bring down leverage to below 5 times by the end of 2015 as the company integrates Naples, Fla.-based HMA. The ratings agency affirmed the company's B1 rating.

"The bet that The Street's making implicitly is that the ACA [Affordable Care Act] can essentially bail out a struggling business model," Ransom said.

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