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Community Health Systems is working with Lazard as restructuring advisor as the company continues to evaluate its options to address its near-term debt maturities, according to sources. One of the country’s largest hospital providers, Community has over $4.7 billion of debt due in 2019 and 2020, including nearly $1.9 billion of 8% senior notes that mature in November 2019. Management has been reviewing all of its options to restructure its balance sheet, sources add, including a possible exchange scenario involving both the 2019 and 2020 notes.

Community’s term loan lenders have also begun organizing in anticipation of the company’s future restructuring actions. Lawyers from Davis Polk held an initial call on Friday, March 9, with certain term loan G and H lenders as an early, precautionary step to better coordinate and plan for potential restructuring options that the company could take, sources told Reorg. The group, which consists of over a dozen term loan lenders, is in the early formation stages and has not yet engaged in discussions with the company, sources said. The term loan lenders on the call do not plan to challenge the company’s latest amendment to its debt, sources add, noting that the group, which began to organize around the time the company’s amendment was announced, has not identified a financial advisor at this time. Credit-Suisse is acting as Community’s term-loan agent.

Representatives for Community Health and Lazard did not respond to requests for comment. Davis Polk declined to comment.

On Community’s latest conference call to discuss its fiscal 2017 and fourth-quarter results, management said it will “proactively manage” its November 2019 maturities, noting that its recent amendment, which replaced covenants and reduced the company’s revolver, “was a first step.” The amended covenants limit first lien net leverage to 5.25x before stepping down to 5x on July 1, 2018, a cushion to current first lien leverage of 4.04x, management told lenders on the call. Reorg Covenants previously concluded that these changes may improve the company’s ability to incur junior lien debt under the Credit Agreement, but a $1 billion cap on alternative incremental financing indebtedness included in the May 2017 amendment could continue to be effective.

The company has $1.037 billion of term loan G maturing at the end of 2019 as well as $1.2 billion of 7.125% senior notes due July 2020 and $3 billion of 6.875% senior notes due February 2022.

Community Health’s capital structure as of Dec. 31, 2017, is shown below.
 

In its latest fourth-quarter earnings period, the hospital and healthcare provider reported adjusted EBITDA of $409 million, a 27.5% decrease from $564 million in the same period a year earlier, partially attributable to the company’s divestiture program. Community ended the quarter with $560 million of cash on hand, up from $240 million at the end of 2016. Cash flow from operations for the quarter was $156 million, down from $327 million during the three-month period in 2016.

To help chip away at its looming $14 billion debt load, Community Health has focused on a number of asset sales over the past year. During fiscal 2017, the company completed its planned divestiture of 30 hospitals. The company has emphasized that the 30 hospitals had “below-corporate-average volume and payer rate growth, mid-single-digit EBITDA margin and were a drag on our cash flow” and that the divestitures were “executed at attractive multiples.”

Community says it expects to close additional hospital divestitures by the end of 2018 that accounted for approximately $2 billion of net revenue in the full fiscal year 2017. The company estimates that in fiscal 2018, the divestitures would generate approximately $1.3 billion of gross proceeds, not including the retention in net working capital. Community says it plans to use the proceeds from these divestitures for incremental debt paydown and that the recent amendment to its credit facility modifies the company’s ability to retain asset sale proceeds, instead of requiring their application to prepay term loans based on pro forma first lien leverage.

Community Health’s term loan G due 2019 was last quoted at 98.75/99.25, according to a trading desk. The company’s term loan H due 2021 was last quoted at 97.25/97.75, while its 8% senior notes due 2019 were quoted at 92.5/93.5.