Investing.com -- S&P Global Ratings has downgraded Community Health (NYSE: CYH ) Systems Inc. to ’SD’ (selective default) from ’CCC+’ following the company’s decision to repurchase a significant portion of its 6.875% senior unsecured notes due 2028. The notes, which have an outstanding value of approximately $625 million, are being repurchased at $750 per $1,000. The rating agency views these repurchases as a selective default under their criteria, as lenders received less value than initially promised under the original securities.

Consequently, S&P Global Ratings also lowered the issue-level rating on the senior notes to ’D’ from ’CCC-’. The ratings on other obligations of Community Health Systems remain unchanged. In the coming days, the rating agency expects to raise the issuer credit rating back to ’CCC+’ from ’SD’ and assign a negative outlook.

This marks the fourth time within three years that the rating of Community Health Systems has been lowered to ’SD’ due to below par debt repurchases. However, the rating agency plans to raise the issue-level rating to ’CCC-’ on the affected debt if any amount remains outstanding after the tender. The repurchase transaction is seen as credit positive as it modestly reduces the company’s outstanding debt.

In related news, Community Health Systems recently entered into an agreement to sell its 80% ownership in Cedar Park Regional Medical Center in Cedar Park, Texas, to minority partner Ascension Health for $460 million. The sale is expected to close in the second quarter or early third quarter of 2025. The company may also consider an additional divestiture later in the year, with the proceeds likely to be used for deleveraging.

While the company’s operating performance has been improving over the past few years, its EBITDA margins are under slight pressure due to higher medical specialist fees and acuity mix. However, the company has benefited from volume increases, lower utilization of more expensive contract labor, and moderating inflationary pressure. Free cash flow has also improved, although it has been somewhat hampered by delays in the receipt of state supplemental program payments.

Despite these improvements, S&P Global Ratings continues to monitor the long-term sustainability of Community Health Systems’ capital structure, which remains highly leveraged, and the potential risk of further distressed exchange transactions.

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