Healthcare sector popping up on distressed market’s radar; Community Health exploring options

By Stephanie N. Rotondo

Seattle, Sept. 19 – The healthcare space has started to tiptoe around the edges of the distressed bond market. Community Health Systems Inc., a regular name in the high-yield arena, appears to be the latest victim, traders reported Monday.

On Friday, it was reported that the Franklin, Tenn.-based hospital chain had hired financial advisers and was exploring its options. The reports were attributed to “people with knowledge of the matter.”

Come Monday, the company confirmed the reports, though it noted that talks were only in the preliminary stages and there was no set timeline as to when a deal of any kind would get done.

Furthermore, the company said it did not plan to make any further comments on the review until something concrete was in the works.

When the reports first materialized on Friday, the Community Health bonds dropped “a fair amount,” a trader said. As Monday’s session began, the market started to push up the debt, but appeared to give up by the bell, he noted.

As such, the 6 7/8% notes due 2022 opened the day around 87½, which compared to an 83½ to 84 zip code on Friday. By day’s end, the bonds had settled back in to “85-ish,” the trader said.

At another desk, a trader said there were “tons of trades” in the 6 7/8% notes, which he called down over 2½ points at 84 7/8.

However, he added that the 8% notes due 2019 were up half a point at 96½, though they had been up more earlier in the day. The 7 1/8% notes due 2020 closed 1½ points higher at 91 7/8, he said.

Bets are that Community Health will seek to sell some or all of its assets, but that could prove to be a struggle. As Gimme Credit LLC analyst Vicki Bryan pointed out in an afternoon comment, leverage is around 6x.

The company could sell off some assets at a discount, she noted, and use those funds to reduce debt. But that tactic has already been tried as well, with Community Health spinning off some of its operations into Quorum Health Corp. on April 29 – and that entity is itself considering selling some of its own non-performing assets.

Bryan also pointed out in her comments that the latest news comes just as the third quarter is wrapping up, which suggests that earnings may be less than stellar.

Concordia recovers

Elsewhere in the healthcare sector, Concordia International Corp. bonds rebounded a bit from Friday’s lows.

The debt had declined about 10 points on Friday after the United Kingdom introduced new legislation that would prevent drug companies from massively increasing drug prices.

“Maybe it was just overdone a little bit,” a trader said, seeing the 9½% notes due 2022 recoup about 1½ points, closing at 71¼. The 7% notes due 2023 were meantime up over 2 points at 67¼.

“If I had to guess, I would say yes, it was probably overdone,” a second trader said of Friday’s losses, adding that Monday’s gains could be attributed to investors “buying on the dip.”

He pegged the 9½% notes in the low-70s and the 7% notes in a 67 to 68 context.

The Canadian drugmaker was singled out in the U.K. earlier this year for doing just what the proposed bill is hoping to stem – adding unreasonable price increases to its products. The company’s U.K. unit has a variety of specific generic drugs to which there are few, if any, competitors. That allowed Concordia to increase the price of one of its drugs – eyedrops for bacterial conjunctivitis – by 14 times.

This isn’t the first time Concordia has faced troubles. Just last month, the company’s equity took a major downturn after revenue guidance was slashed by 16%. Concerns about the company’s debt burden and chatter that there would be no merger partner to save the day have also played a role in the company’s decline.

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