Hospital names fall on Community Health earnings warning; junk funds see $3.34 billion inflow

By Paul Deckelman and Paul A. Harris

New York, Oct. 22 – Bonds of hospital operators were in need of emergency care on Thursday. The sector was broadly lower in heavy trading after Community Health Systems, Inc. issued guidance on its expected third-quarter earnings, coming in well below analysts’ expectations.

Bonds of other hospital operators also took it on the chin on Thursday, pulled lower by the weak Community Health outlook. Among them were Tenet Healthcare Corp., LifePoint Hospitals Inc. and HCA Holdings, Inc., which just a week ago also warned that its quarterly earnings would come in below Wall Street’s expectations.

Meanwhile, another segment of the health-care industry, pharmaceuticals, continued to have problems on Thursday. Valeant Pharmaceuticals International Inc.’s paper continued to get hammered in heavy trading, although the carnage was not as bad as that seen on Wednesday, when the Canadian drug maker was accused in a trading house research report of using a string of shadowy specialty pharmacies to artificially inflate its revenues, a charge that the company vehemently denies.

Valeant meanwhile tried to reassure investors, planning a Monday conference call at which it said it would refute the allegations and explain in detail the operations of its specialty pharmacies.

Other pharmaceutical and biotech names remained on the downside, including Endo International plc and the newly issued notes of Concordia Healthcare Corp.

Other recent new deals not connected to the beleaguered drug manufacturing industry, such as those from Jarden Corp. and Greatbatch Ltd., continue to hold onto their aftermarket gains.

Statistical measures of junk market performance were mixed for a third consecutive session on Thursday, having turned mixed on Tuesday and then staying there on Wednesday, after having been higher across the board on Friday and then again on Monday.

Another numerical performance gauge – flows of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – posted its third straight net addition of cash in the latest reporting week, a $3.34 billion inflow. It was the biggest such cash gain seen so far this year and the second largest on record.

Verisure talk is 6% to 6¼%

No deals priced during Thursday's primary market session.

The only solid news came out of Europe.

Verisure Holding AB talked its €700 million offering of seven-year senior secured notes (B1/B) to yield 6% to 6¼%.

The deal is set to price on Friday.

Joint global coordinator Goldman Sachs will bill and deliver. Morgan Stanley, BofA Merrill Lynch, Nomura and Nordea Securities AB are also global coordinators.

Barclays, Citigroup, Credit Suisse, Deutsche Bank and HSBC are joint bookrunners.

Proceeds will be used to help fund the acquisition of a 46% stake in the Malmo, Sweden-based provider of monitored alarm solutions by Hellman & Friedman from Bain Capital and to refinance debt.

Wariness in energy sector

The only other dollar-denominated deal in the market is American Energy – Permian Basin, LLC's $560 million offering of five-year senior secured first-lien notes, which was scheduled to price during the middle part of the present week but is now expected to be pushed into the week ahead, sources say.

The deal was being guided in the 9% area but is now undergoing a process of price discovery, possibly moving talk into the double digits, according to a sellside source.

The fact that it is a first-lien deal, and may not be receiving the warmest of receptions, is serving to chill other potential issuers from the energy sector that may be measuring the primary market's receptivity to possible secured deals, a trader said.

One such name, frequent issuer Chesapeake Energy Corp., is thought to be measuring the market in terms of a first- or second-lien deal, a trader said on Thursday afternoon.

Chesapeake's existing bonds, all of them unsecured, have been down a point “generically” across the structure, the source said, spotting the Chesapeake Energy 6 5/8% senior notes due Aug. 1, 2020 closing Thursday at 72½ bid, 73 offered, down from 73½ bid, 74 offered earlier in the week.

Trading volume was relatively low, the trader specified.

However, the uncertainty surrounding the American Energy deal now in the market could be a possible explanation for the further drag on Chesapeake paper as well as that of others from the troubled sector, the trader said.

Selectively open

Apart from troubled sectors such as energy, minerals and mining, and pharmaceuticals, the primary market should be open to select credits, a debt capital markets banker said on Thursday.

The tight execution seen by Jarden Corp., which sold $300 million of 5% eight-year notes (Ba3/BB) on Wednesday, probably indicates as much, the banker said, adding that there is presently pent-up demand (again, for the right names).

The well-oversubscribed Jarden deal priced at par, at the tight end of both price talk and initial guidance, and has turned in a completely respectable performance in the secondary market, sources say.

The new Jarden 5% notes due 2023 were 101¾ bid, 102¼ offered at Thursday's close, little changed on the day, a trader said.

Earnings season is serving as one impediment to prospective issuers to which the market is currently open, the banker said.

“There are people who saw the Jarden execution and would like to come right now,” the source remarked.

“But they are in an earnings blackout, and so they will have to wait.”

Hospitals are hurtin’

In the secondary market, “the hospitals were the main story today,” a trader said, pointing to the nosedive that Community Health Systems’ bonds took after the Franklin, Tenn.-based hospital operator put out preliminary financial and operating results for the three months ended Sept. 30 – projections that came well below what analysts were looking for.

The company’s 6 7/8% notes due 2022 were the busiest bonds in Junkbondland on Thursday, with over $129 million traded as they ended at par, down 6 points on the day.

A second trader saw two-sided markets around a par-to-100½ context, which he called down at least 5 points on the day.

“It’s pretty painful if you own them,” he opined.

Community Health’s other bonds were also lower in busy trading. Its 8% notes due 2019 lost 1 full point to end at 103¼ bid, on volume of over $15 million.

Its New York Stock Exchange-traded shares meantime plunged $14.25, or 35.14%, to close at $26.30 per share, on volume of 27.1 million – more than 15 times the usual volume.

The bonds and shares plummeted after the company released its preliminary earnings estimates for the just-passed third quarter, with the final numbers due out on Nov. 2.

It suggested that adjusted earnings for the quarter ended Sept. 30 will come in at 56 cents per share, which is well below the average of around 72 cents per share expected on Wall Street.

The company also projected that EBITDA will be around $661 million, down from $750 million a year ago and down as well from analysts’ expectations of around $760 million.

It also said that it would report revenue of about $4.85 billion, down from the nearly $5 billion the financial community expects.

The company blamed the lessened expectations on a roughly 2% drop in patient admissions at its established locations as well as a fall-off in the percentage of people covered by commercial insurance, which offers the best reimbursement to the hospitals.

Community Health’s not-so-robust expectations spooked investors in other hospital bonds as well.

Dallas-based Tenet Healthcare’s 6¾% notes due 2023 sank by more than 3 points, ending at 97 5/8 bid, on volume of more than $37 million.

Its 8 1/8% notes due 2022 were also down more than 3 points, falling to 104 bid, with more than $12 million having changed hands.

Its 6% notes due 2020 lost 1 point, moving down to 108 bid.

Nashville-based HCA’s 5 3/8% notes due 2025 lost 1¼ points, ending at 101 bid, while its 7½% notes due 2022 ended at 113½ bid, down 1¾ points.

One of the traders saw HCA’s 5% notes due 2024 unchanged, which he called “kind of odd,” given the sector-wide carnage going on around those bond.

A trader saw Brentwood, Tenn.-based LifePoint Health’s 5½% notes due 2021 ending at par and calling that down more than 3 points, with over $20 million having been traded.

The shares of the other hospital operators were also all multiple points lower on very active volume.

Another slide for Valeant

The bloodletting in the hospitals sector took some of the focus away from what had been the week’s dominant name in the secondary market, Valeant Pharmaceuticals.

Some – but not all.

Valeant’s paper was down for a third straight session, roiled by allegations by a trading house, which specializes in selling short against the target company’s shares, that the Laval, Quebec-based drug manufacturer was using a network of “phantom pharmacies” to artificially and fraudulently boost its revenues, a charge the company has vehemently denied.

Its bellwether issue, the 6 1/8% notes due 2025, “was the really active one,” a trader said, with over $120 million of the notes changing hands. He saw the bonds down 4 or 5 points on the day in the mid-80s.

“Valeant was still getting chased lower and whipsawed around,” a second trader said.

Its shorter issues were also active, with the 5 7/8% notes due 2023 ending down nearly 1 point at 87¼ bid. More than $69 million of the notes traded.

Its 5 3/8% notes due 2020 were seen down 2¾ points at 88¾ bid, on volume of more than $35 million.

Its NYSE-traded shares – which on Wednesday “got slaughtered,” a trader said – lost an additional $8.74 on Thursday, or 7.37%, ending at $109.87. Volume of 55 million shares was nine times the norm.

One of the traders noted that those shares “began the week at $165. Now they’re down to $110. Ouch.”

Valeant announced Thursday that it will hold a conference call on Monday, on which it will explain its side of the story following the highly negative research report from Citron Research, which accused Valeant of using specialty pharmacies to create “phantom sales” of its products.

The report said that the firm believes that “the whole thing is a fraud to deceive the auditors and book revenue.”

Valeant contends that Citron issued false and misleading research in an effort to drive its stock down so the short-seller would profit.

Other pharma names suffer

Valeant’s troubles have proven to be contagious for other names in the drug industry.

For a second straight session, bonds of Irish pharmaceuticals maker Endo International were trading off on active volume.

Its 6% notes due 2025 lost 1½ points to end at 96¾ bid, on $12 million of volume.

A trader saw the company’s 5¾% notes due 2022 off by 3½ points at 97½ bid.

The new 9½% notes due 2022 from Oakville, Ont.-based drug producer Concordia Healthcare were seen in a 94-95 context, still well down from Tuesday’s par issue price.

A trader saw them at 95 5/8 bid, off nearly a full point, with over $16 million traded.

Jarden, Greatbatch stay strong

Away from the beleaguered pharmaceutical issues, a trader saw the new Jarden bonds that priced on Wednesday having firmed on Thursday to around 101¾ bid, 102¼ offered from prior levels around 101½ bid.

A second saw them even better at 102 1/8 bid, up 1/8 point, with over $23 million traded.

The Boca Raton, Fla.-based consumer products company’s $300 million deal had priced at par off the forward calendar.

A trader saw Greatbatch’s new 9 1/8% notes due 2023 around the 101½ bid level Thursday but said he had not seen any trades during the session.

The Frisco, Texas-based medical devices manufacturer had priced $360 million of the notes at par on Tuesday in a regularly scheduled forward calendar offering, and they had traded well above 101 bid in initial aftermarket dealings.

Indicators stay mixed

Statistical measures of junk market performance were mixed for a third consecutive session on Thursday, having turned mixed on Tuesday and then staying there on Wednesday after having been higher across the board on Friday and then again on Monday.

Thursday’s session was the fourth mixed session in the last six trading days, the seventh mixed session in the last 12 and the ninth mixed session in the last 15.

The KDP High Yield Daily index suffered its first loss on Thursday after four successive gains, declining by 22 basis points to end at 67.35, in contrast to its 8-bps rise on Wednesday. It was the index’s third loss in the last seven sessions.

Its yield was unchanged at 6.49% after having risen by 3 bps on Wednesday – an unusual move since the yield normally moves inversely to the index reading, customarily falling when the index rises and vice versa. That increase followed three straight narrowings, including Tuesday’s 1-bp easing.

The Markit Series 25 CDX North American High Yield index improved after two straight losses, rising by 3/8 point to end at 102 11/16 bid, 102 23/32 offered. On Wednesday, it had retreated by 11/32 point. Thursday’s upturn was its fourth in the last six sessions and its sixth gain over the last 12 trading days.

The Merrill Lynch North American Master II High Yield index weakened on Thursday after having put up four straight advances before that. It finished down by 0.086%, versus Wednesday’s 0.06% gain. Thursday’s setback was its fourth in the last eight sessions.

That loss threw the index’s year-to-date return back into the red, with a 0.063% cumulative loss, after just one session on the plus side; the year-to-date return had edged back into the black on Wednesday with a 2015 gain of 0.023% – its first time in positive territory in exactly one month, since Sept. 21, when the index had finished up 0.051% on the year before it slipped into the red the following session.

The cumulative loss, though, remained still well down from the 3.069% year-to-date loss seen on Oct. 2, which was the most red ink for the year so far and the index’s lowest level since Oct. 5, 2011, when the market measure had shown a 3.834% year-to-date deficit.

Funds post huge inflow

Another numerical performance gauge – the flow of investor cash into or out of high-yield mutual funds and exchange-traded funds, considered a reliable barometer of overall junk market liquidity trends – posted its third straight net addition of cash in the latest reporting week, a $3.34 billion inflow.

That inflow was the largest such cash addition seen this year, eclipsing the net $2.94 billion that came into the funds during the week ended Feb. 11.

It was also believed to be the second-largest inflow on record, dwarfed only by the net $4.25 billion that came into the funds in the week ended Oct. 26, 2011. (See related story elsewhere in this edition.)

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