July 19, 2013 / 5:36 PM / 5 years ago

Community Health CDS widens on earnings, legal woes

NEW YORK, July 19 (IFR) - The CDS spreads in Community Health Systems eroded more than 10% on Friday on a raft of bad news for the hospital operator, which pre-announced disappointing earnings and a widening investigation of the company by the US Department of Justice.

CDS in the Tennessee-based company widened 34bp to 371.5 after it said it would miss its EBITDA target due to weak volumes and a drop in margins. It said adjusted EBITDA is anticipated at USD414m, down from USD483m a year ago. Net operating revenues for Q2 will be USD3.236bn versus USD3.243bn for the year-ago period.

In addition, Community Health expects income before taxes will be USD65m compared to USD151.7m last year.

The EBITDA miss was 17% below Bank of America Merrill Lynch’s estimate.

“Despite the miss, full year EBITDA guidance was only lowered by $75m, implying that 2H13 would be roughly in line with prior expectations,” BofA Merrill analyst Kevin Fishbeck wrote in a client note. The company said this quarter is anticipated to be its first significant earnings miss since Q3 2006.

CDS is a kind of insurance investors buy to guard against the company defaulting on its outstanding debt, and Friday’s widening means that the market believes the likelihood of a default is increasing.

Community Health’s bonds also declined on Friday, with the USD2bn 8% November 2019s wrapped around 106.0 from 108 yesterday. Its USD1.2bn 7.125% July 2020s were seen at 103.25 from 104.0 at Thursday’s close.

Even so, the synthetic market has maintained a mostly optimistic opinion of Community in spite of its recent woes. CDS curves have steepened in the last three months in short- and intermediate-dated curves, even in the face of overall intraday volatility in the markets.

In addition to Friday’s disappointing announcement, it also said it had received an additional subpoena from the DOJ after meeting twice with the government this year. The investigation, which began in April 2011, has centered on Medicare admissions and its emergency room practices.

“To date we have not seen this investigation impair Community Health’s ability to do deals,” Bank of America analysts said.

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