Relative Value Opportunity With Community Health Systems High Yield Bond

Below are details of a High Yield bond issued by Community Health Systems. As part of Bondsquawk’s High Yield Portfolio released earlier, this bond offers an investor an opportunity to capture high income with the potential for price appreciation.

Community Health Systems (CUSIP 12543DAL4)

8.00% Fixed Coupon Paid Semi-Annual basis

November 15, 2019 Maturity Date

November 15, 2015 Next Call Date at $104.00 Dollar Price

Current Market: Offered at $109.375, Yield to Worst of 5.72% according to Trade Monster’s Bond Trading Center

+535 basis points Yield Advantage over comparable maturity U.S. Treasury (On the run 3-Year)

$108.88 Dollar Price, 5.89% Yield to Worst at time of Inclusion of Bondsquawk’s High Yield Portfolio

‘B’ Rating by Standard & Poor’s which falls on the High Yield spectrum

Company Profile

Community Health Systems, Inc. (Ticker: CYH) is a nonurban operator of acute-care hospitals located throughout the United States. The company has 135 hospitals in 29 states and is the second largest publically traded hospital company behind HCA. This broad presence gives it the most diversified geographic footprint among its competitors.

Key Drivers

Improving Profitability and Free Cash Flow: CYH reported EBITDA of $469.8 million in the Third Quarter of 2012, an improvement of 5.5% from a year ago and a 7.8% from a year ago. In addition, the company’s Free Cash Flow for the past year stands at $418 million, an increase from $292 million in the Third Quarter of 2011.

Deleveraging Potential: The Company has $9.6 billion in total debt as of the Third Quarter. Using the last twelve months of data, CYH has a Total Debt to EBITDA ratio of 5.0x which is higher than some of its peers in the industry. Healthcare reform coupled with improvements in profit margins of recently acquired hospitals is expected to be some of the catalyst for continued profitability next year. Based off of consensus estimates, EBITDA is expected to grow to $2.01 billion for 2013. If the company meets or surpasses expectations, this in turn should lower the company’s leverage and improve its credit profile which should be a positive for bond holders.

Relative Value: The bond is callable on and anytime after the following dates at the following prices:

November 15, 2015 $104.00 5.72%

November 15, 2016 $102.00 5.74%

November 15, 2017 $100.00 5.77%

At a current price of $109.375, the bond has a Yield to Worst of 5.72% assuming the bonds are called in 2015. Yield to Worst takes the lowest of the Yields (including Yield to Maturity of 7.02%) for a “worst-case” scenario.

Comparatively, this bond provides a yield advantage to investors. Lower rated (‘B-‘ by S&P) HCA 8.0% 10-1-2018 is offered at $117.25 for a Yield to Worst of 4.56%. HMA 7.375 1-15-2020 which also has a lower rating (rated ‘B-‘ by S&P ) has a Yield to Worst of 5.27%, given that it can be purchased at $109.00. So investors can pick up 116 and 45 basis points, respectively by investing in CYH 8.0% 11-15-2019 which is rated one notch higher by S&P at ‘B’.

Disclaimer : The above content is provided for educational and informational purposes only, does not constitute a recommendation to enter in any securities transactions or to engage in any of the investment strategies presented in such content, and does not represent the opinions of Bondsquawk or its employees.

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