Bankrupt Cano Health, Community Health distressed paper mostly quiet; returns soft

By Cristal Cody

Tupelo, Miss., Feb. 5 – Cano Health LLC’s paper slowed in secondary trading ahead of a long-expected Chapter 11 bankruptcy filing on Sunday.

The 6¼% senior notes due 2028 (C/D) last traded in January in the single digits and saw only a handful of trades in December.

Cano Health announced that it entered a restructuring support agreement with a majority of lenders of its secured revolving and term loan debt and senior notes and received a commitment for $150 million in new capital from certain existing secured lenders.

Under the restructuring support agreement, nearly $1 billion of secured debt will be converted into new debt and full equity ownership in the reorganized company.

The health care space registered a number of bankruptcies and defaults in 2023, including a Chapter 11 bankruptcy filing from Envision Healthcare Corp. in May, a second bankruptcy filing from pharmaceutical manufacturer Mallinckrodt plc in August and distressed secondary repurchases from Community Health Systems Inc. in December.

Health care-related default candidates this year include Community Health, Bausch Health Cos., Inc., Radiology Partners Inc. and Diversified Healthcare Trust, sources said.

The health care and pharmaceutical space had a U.S. junk bond default rate par-weighted of 4.5% in 2023, down from 6.4% in 2022, that is expected to climb significantly in 2024 to 19%, according to a Fitch Ratings report on Monday.

Fitch forecasts the default rate for health care and pharma leveraged loans in 2024 at 8.5%.

U.S. default rates across leveraged loans and high yield overall are forecast to range from 3.5% to 4.5% in 2024, Fitch said.

Jefferies LLC analyst Brian Tanquilut said in a note released Monday to Prospect News the firm has a “cautiously positive view” on the health care services space for 2024.

“Utilization trends remain elevated and Street numbers appropriately reflect tough Y/Y comps, and M&A could provide earnings upside surprises,” he said.

The 2024 elections could create volatility mid-year, “but it'll be difficult for any administration to pass meaningful changes that would impact H/C providers,” he said.

Community Health is considered a “buy.”

“While we acknowledge investor concerns regarding CYH's high debt profile, we think the $50-60MM in expected contract labor reductions in '24 and steady volume growth should drive margin to the mid-teens percentage range over time,” Tanquilut said.

Community Health’s 6 1/8% secured notes due 2030 (Caa2/CCC-) stayed quiet in the secondary space on Monday but finished the prior week nearly 2 points higher.

Markets widely sold off on Monday following reported comments from Federal Reserve chairman Jerome Powell on a “60 Minutes” broadcast Sunday.

Bond investors “expect more aggressive rate cuts than the Fed is likely to deliver,” according to a note from Confluence Investment Management strategists following Powell’s CBS interview.

Stock indices were down across the board as Treasury yields shot up.

The S&P 500 index ended 0.32% lower.

The iShares iBoxx High Yield Corporate Bond ETF declined 36 cents, or 0.47%, to $76.83.

The benchmark 10-year note yield jumped 13 basis points to 4.16%.

Market volatility stayed in check, though, with the CBOE Volatility index down 1.3% at 13.67.

Powell’s comments were met with disapproval in the wider investment market with numerous comments following the sell-off on Monday.

Yahoo user Mort said “Powell's almost daily pronouncements keep the market dropping at regular intervals. However, that is misleading. Except for the major techs, most issues are treading water in a relative sense, and the market is stagnant to lower. If you are part of the Dow or S&P 500, you are doing OK, but otherwise, this actually is great, because bargains abound, especially in preferred stocks. Overall, this is a good time for one to add to the fixed income component of one's portfolio.”

Cano little traded

Cano Health’s paper slowed in secondary trading ahead of its Chapter 11 bankruptcy filing, a source said on Monday.

The 6¼% senior notes due 2028 (C/D) last moved on Jan. 25 on a 7 bid handle with only a handful of trades seen in December.

The bonds sank from trading with a 44 handle last year after the company posted steep second-quarter losses and announced it was pursuing and evaluating interest in a sale of the company or its assets.

Cano Health announced on Sunday that it entered a restructuring support agreement with a majority of lenders of its secured revolving and term loan debt and senior notes and received a commitment for $150 million in new capital from certain existing secured lenders.

The new debtor-in-possession financing to provide liquidity for ongoing operations, including to pay wages for doctors and nurses, will be subject to approval from the U.S. Bankruptcy Court for the District of Delaware.

Cano Health said it expects to emerge from the restructuring process in the second quarter; however, it noted the restructuring support agreement allows for it to solicit partnerships and potential sale offers for the entire company or its assets.

The Miami-based primary care provider said it has made significant changes since Mark Kent assumed the permanent chief executive officer role in August, including exiting the California and Puerto Rico health care markets, divesting operations in Texas and Nevada and turning its focus on its core Florida Medicare Advantage and ACO Reach lines of business.

S&P Global Ratings downgraded the issuer and the notes on Monday.

Cano Health’s stock (NYSE: CANO) closed Friday ahead of the filing at $2.30, down from a 5 handle at the start of the year.

Community Health improves

CHS/Community Health Systems, Inc.’s 6 1/8% senior secured second-lien notes due 2030 (Caa3/CCC-/CCC-) failed to attract much secondary interest over the session and were last seen on Friday at 66¼ bid, a source said.

The notes finished the prior week about 1¾ points higher.

CHS/Community Health’s 6 7/8% senior secured second-lien notes due 2029 (Caa3/CCC-/CCC-) traded down about ½ point to just under 69 bid in thin activity on Monday.

In January, Fitch said it downgraded Community Health Systems and subsidiary CHS/Community Health to CCC+ from B-, reflecting the company’s reduced EBITDA.

Community Health completed $305 million of below-par repurchases of its first- and second-lien notes late last year.

Shares (Nasdaq: CYH) in the Franklin, Tenn.-based operator of acute care and outpatient facilities closed off 3.44% at $3.65 on Monday.

Distressed returns weak

S&P U.S. High Yield Corporate Distressed Bond index one-day total returns finished Friday lower at negative 0.34% but were improved from the start of the week.

One-day total returns were 0.14% on Thursday, minus 0.14% on Wednesday, 0.32% on Tuesday and negative 0.94% in the first session of the prior week.

Month-to-date total return losses were 0.2% on Friday.

Year-to-date total return losses widened to minus 2.35% at the close of the week from minus 2.01% on Thursday and negative 2.33% at the week’s start.

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