Favorable industry dynamics, including reimbursement levels that have bounced back from the dark years of the Balanced Budget Act, support Community Health Systems' $1.25 billion senior secured credit facility. "Reimbursement is back in line with traditional levels and third-party payor rates remain favorable," said Luke Coha, analyst at Fitch Ratings. Community Health, a rural hospital management company, is refinancing its credit facility to improve interest expenses and extend maturities. The new credit, which consists of an eight-year, $800 million "B" loan and a six-year, $450 million revolver, has been assigned a BB rating by Fitch.
Reimbursement trends will stay favorable for at least the near- to intermediate-term as Medicare rates for 2003 are essentially established, Coha noted. Given the damage previous efforts to limit spending did to the industry and the importance of the sector, legislators are unlikely to make significant cuts in healthcare funding, he added. "The Balanced Budget Act did a lot of damage, and cutting healthcare spending is not a swift political move," he said.
The credit, led by J.P. Morgan and Bank of America, is a refinance that is rolling the "A," "B" and "C" term loans into a single "B" tranche (LMW, 6/16). The extension of the maturities is a positive for the credit, Coha stated, adding that the rating also reflects the company's leading market position. Community Health typically is the only provider in a given market and, although it is often difficult to attract physicians to rural areas, the company has the ability to conduct national searches.
But there are potential downsides. "Community Health is acquisitive, and there are always risks when you buy facilities to raise margins," Coha said. Labor costs also are a source of concern, and the company may encounter problems hiring nurses amid a nationwide shortage.