Code Blue

These Hospital Bonds Are on Life Support

Health care companies are faltering, but debt investors don't seem to care.
Photographer: Spencer Platt/Getty Images
COMMUNITY HEALTH SYSTEMS INC
-0.14
At Closing, April 20st
4.02 USD
TENET HEALTHCARE CORP
-0.38
At Closing, April 20st
24.09 USD

Junk-bond buyers appear to have a blind spot when it comes to for-profit health care companies.

They've snapped up bonds of Tenet Healthcare Corp. and Community Health Systems Inc. despite the drastically souring outlook for both hospital operators. Some of this may be idiosyncratic or the result of specific investors' strategies (or unwillingness to sell). Franklin Resources Inc., for example, now owns nearly 20 percent of Community Health's total debt and more than half of its $1.9 billion of bonds maturing in 2019, according to recent filings compiled by Bloomberg.  

Rocky Year

Shares of Community Health and Tenet Healthcare have both had a tumultuous year

Source: Bloomberg

In general, however, as credit investors plow into broad indexes of riskier assets, it appears they're simply turning a blind eye to the ugly balance sheets of hospital operators amid an increasingly difficult backdrop. Federal programs like Medicaid are clamping down on costs. And the Trump administration's various efforts to weaken the individual insurance market will potentially put hospitals on the hook for more uncompensated care as fewer people sign up for health care coverage.

Meanwhile, Tenet and Community Health made some questionable decisions in recent years to borrow billions of dollars to make acquisitions that now look pricey. These companies don't generate a ton of cash at the best of times, and much of what they do have now goes to debt service rather than much needed hospital improvements.

Circling the Drain

It's hard for companies to confront mountainous piles of debt when they don't generate consistent cash flow

Source: Bloomberg

These hospital operators have a narrowing field of options right now. Tenet recently tried, and failed, to sell itself, which sent its shares plunging on Thursday. Both hospitals report earnings within the next few weeks. If HCA Healthcare is any guide -- the company pre-announced worse-than-expected third-quarter earnings last week -- they won't be pretty.

But still, no one in the bond market seems to care. Tenet's bonds have soared 7.8 percent so far this year, even though its stock has fallen 13.3 percent. Community Health debt has gained 16.5 percent, four times the 4.1 percent gain in its shares.

Diverging Fates

Bond investors seem to be turning a blind eye to difficulties recognized by stock investors

Source: Bank of America Merrill Lynch index data, Bloomberg

This seems sort of ludicrous. One hedge fund manager, Boaz Weinstein of Saba Capital Management, sees this as an opportunity to short some of these companies' junior bonds. Weinstein pointed out at a conference this month that Community Health's $14 billion pile of debt is 20 times the value of its equity.

Unless the company's fortunes turn around, it will be forced to reckon with its debt in painful ways for its business as well as the returns of creditors. It's hard to see how the business could get better with President Donald Trump's continuing attempts to torpedo health care insurance subsidies, which is widely expected to hurt hospital profitability.

Credit investors at some point are going to have to come to grips with this. Community Health and Tenet, along with HCA, account for $49 billion of debt in a broad U.S. high-yield bond index. This pile is looking increasingly vulnerable to a day of reckoning.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the authors of this story:
    Lisa Abramowicz in New York at labramowicz@bloomberg.net
    Max Nisen in New York at mnisen@bloomberg.net

    To contact the editor responsible for this story:
    Daniel Niemi at dniemi1@bloomberg.net

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