CYH Sr Unsecured Notes: 2019-2022

Publicly traded companies mentioned herein: Community Health Systems Inc (CYH), HCA Holdings Inc (HCA), Quorum Health Corp (QHC)

Highlights

The presenter has set up a cap structure trade and is short Community Health’s unsecured debt at an average cost of 78-80. The position includes the 2019, 2020, 2021, and 2022 bonds (all trading between 70 and the low-90s), and he is long CYH common stock as a hedge. He views hospitals as single-digit growth businesses that are levered to economic cycles, and in a cyclical downturn with rising unemployment a hospital’s EBITDA can evaporate. With unemployment at 4.9% and wage pressure mounting in the sector, the timing and risk/ reward appear to be attractive for the bearish stance on CYH because it is relatively poorly positioned, highly levered and facing a wall of maturing debt, and vulnerable to repeal/replace [of the Affordable Care Act (ACA)] risk. Bulls think CYH can sell underperforming facilities and the Street is forecasting $2+ billion of annual EBITDA looking out through 2019; however, if the presenter’s assessment of the macro environment and value of CYH’s assets - many of which are “capital starved” - prove to be accurate, 2019 EBITDA could land in the $1.5-1.6 billion range. A restructuring that sends the unsecured bonds meaningfully lower could be necessary, and he is positioned accordingly.