Short Thesis on Community Health Systems (CYH)

Short: Community Health Systems
(NYSE: CYH)
Current Share Price 6.2$
Blended Implied Target 1.4$
Implied Upside/(Downside) -77.7%

1
The Short Summary
Over-leveraged, poorly-run hospital in a declining segment of
the healthcare provider industry
Main Thesis:
1. Rural hospitals are in decline around the nation due to higher
unemployment and uninsured rates
2. CHS’ management have been mismanaging hospital operations
and asset placement
3. CHS’s acquisition strategy has laden it with unsustainable debt of
more than $14 billion at >7x leverage which it cannot pay down
even with divestitures
4. As further evidence of CHS’s mismanagement, the company has
been charged by the SEC multiple times over the past few years for
fraudulence and misrepresentation
Financial Overview (LTM 2Q '17) $mm
Revenues (after bad debts) 17,478
Adj. EBITDA 2,034
Adj. EBITDA Margin 11.6%
Net Debt 14,175
Market Cap 712
Enterprise Value 14,887
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Adj. EBITDA 829$ 1,523$ 1,679$ 1,755$ 1,830$ 1,981$ 1,840$ 2,716$ 2,640$ 2,221$
Change in Net Working Capital 244 98 88 92 37 (40) (192) (214) (818) (177)
Capex (518) (679) (573) (659) (766) (763) (607) (803) (938) (729)
Cash Taxes (42) 65 (57) (128) (26) (56) (73) (180) (12) 16
Unlevered Free Cash Flow 513$ 1,008$ 1,137$ 1,060$ 1,075$ 1,122$ 968$ 1,519$ 872$ 1,331$
Cash Interest (362) (654) (657) (651) (681) (594) (583) (831) (925) (930)
Levered Free Cash Flow 151$ 354$ 480$ 409$ 394$ 528$ 385$ 688$ (53)$ 401$
FCF Yield 2.1% 3.2% 4.0% 3.2% 2.9% 3.6% 2.6% 3.2% -0.2% 1.9%
Levered Free Cash Flow after Acquisitions (6,757)$ 558$ 306$ 161$ 152$ 206$ 341$ (2,315)$ 45$ 1,640$

2
Capitalization
Rating Maturity Rate Floor Price Yield
6/31/17 $
Amount
x LTM 6/31/17
EBITDA
LTV
ABL Revolver ($150mm) - 11/17 4.0% 150
ABL Revolver ($450mm) - 11/18 4.0% 450
Revolver ($261mm) Ba3/B+ 01/19 L+2.75% 4.7% -
Revolver ($739mm) Ba3/B+ 01/21 L+2.75% 4.7% -
Term G Loan ($1.6bn) Ba3/B+ 12/19 L+2.75% 1.0% 99.0 4.7% 1,331
Term H Loan ($2.9bn) Ba3/B+ 01/21 L+3.00% 1.0% 99.1 4.7% 2,440
Senior secured notes ($1.0bn) Ba3/B+ 08/21 5.13% 98.0 5.7% 1,000
Total 1st Lien Debt 8,471 4.2x 56.9%
Senior unsecured notes ($2.0bn) Caa2/CCC 11/19 8.0% 97.0 9.6% 1,925
Total Senior Debt 14,596 7.2x 98.0%
Capital leases 285
Other 62
Total Debt 14,943 7.3x 100.4%
Cash 768
Net Debt 14,175 7.0x 95.2%
Market Cap 712
Enterprise Value 14,887 7.3x 100.0%
LTM 6/17 EBITDA 2,034$
* A 4% effective rate was assumed for the ABL Revolvers

3
Company Overview
Business Overview Hospitals by type
Revenue by Segment Locations
* Home care agencies (in-home outpatient care) does not meet 10% threshold of net revenue, profit, loss, or total assets for reporting
24%
11%
12%
53%
Managed
Care
Self-pay
Medicaid
Medicare
19
26
32
66
Individual Hospitals with In-Market Compeition
Individual Hospitals with Out-of-Market Competition
12 Local Hospital Markets
10 Statewide / Regional Hospital Networks
46%
13%
18%
23%
143
Hospitals
143
Hospitals
20
States
• Community Health Systems is a holding company that operates
through subsidiaries
• Operator of general acute care hospitals and outpatient
facilities in the United States
• Concentrated in Florida, Texas, Pennsylvania and
Indiana
• Strategy focused on rural communities and growing
through acquisitions
• Owns and leases 143 hospital facilities

4
Industry Overview
Spending Profile Total U.S. Healthcare Spending
U.S. Health Expenditure Percentage of GDP Historical and Projected Health Care Service Spending
32%
26%
13%
8%
7%
5%
2016 Healthcare Breakdown
Hospital Care
Professional Services
Retial Medical Products
Residential and Personal
Care
Private Health Insurance
Administration
Nursing Care

5
Industry Overview
Industry Landscape Hospital Trends
Margin Overview Between Rural and Urban Hospitals Hospital Margin Comparison Between Rural and Urban
-1000000010000000
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
Number U.S. Hospitals 1975-2015
Revenue (Billions)0
10,000
20,000
30,000
40,000
50,000

Investment Thesis
Rural hospitals are in decline
Firm-level operational mismanagement
Unsustainable leverage with no turning back
SEC findings on fraud and misrepresentation

7
Rural hospitals: shutting down or at risk
Rural Hospital Trends
• No Medicaid expansion
• ACA rural hospital cuts
• Higher unemployment &
uninsured
Open for business Hospital shut down

8
Rural hospitals: Shutting down or at risk
Hospital Closures Rural Hospital Vulnerability
• Locations of rural hospital closures since 2010 are remarkedly similar to CHS’ hospital locations
• States most at risk of hospital closures represent the bulk of CHS’ geographic distribution

9
Low quality assets
Unemployment and Uninsured
Higher unemployment and uninsured rates = increased bad debt + dependency on Medicaid
58.9%
Facilities located in cities with
unemployment above national rate of 4.5%
Top geographic concentrations
Florida 21 12.4% No 14.6% 3 4.9%
Texas 15 11.6% No 17.1% 1 4.6%
Pennsylvania 14 11.4% Yes 5.7% 50 5.6%
Indiana 11 10.2% Yes 7.6% 35 3.1%
Tennessee 16 7.3% No 13.2% 8 4.3%
*Unemployment %s are weighed by hospital beds
Unemployment %
at Facilities
State Hospitals
Medicaid
Expansion
2016 %
Uninsured
National
Ranking
% of
Revenues

10
Firm-level operational mismanagement
A company being eaten up
“Same-Store” Admissions Growth EBITDA Margin Shrinking
-1.1%
2.0%
-1.5%
-2.5%
-5.6%
-0.9%
-7.2%
-4.2%
-1.8% -1.9%
-10.0%
-8.0%
-6.0%
-4.0%
-2.0%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Activist Comments
• “It is time for the Board to exercise its fiduciary duty to the
shareholders and replace the current CEO”
• “Fail continuously to meet its own operating guidance for either
top line revenue growth, same store comps or EBITDA”
14.0% 13.9% 13.9%
13.4% 13.4%
12.4% 12.6%
11.7%
10.4%
0.0%
2.0%
4.0%
6.0%
8.0%
10.0%
12.0%
14.0%
16.0%
2008 2009 2010 2011 2012 2013 2014 2015 2016

11
Acquisition strategy gone wrong
1. Since 2007 has acquired many hospitals, most notably from Triad Hospitals and Health Management Associates
• Hospital systems then were on an M&A spree to grow in scale to create regional networks
• CHS also believed that smaller populations will lead to lesser competition from fewer healthcare providers
2. M&A spree has led to poor acquisition choices and unsustainable debt level
• Coupled with poor operational performance
• Currently laden with more than $14 billion in debt at 7.3x leverage
3. Now focused on divesting hospital assets to pay down debt
1. Spun-off 38 hospitals and healthcare consulting arm into QHC in April 2016 (Comprising some of their worst assets)
• Sale vs. spin-off: probably could not find strategic or financial sponsors to buy these assets
• Therefore transferred risk to a separate entity and used some proceeds to pay down debt at the CHS entity
2. Divested two facilities and 80% ownership interest in home care division (74 licensed homes care agencies and 15 licensed
hospice agencies)
3. Not actively pursuing hospital acquisition opportunities

12
Unsustainable Leverage
Debt maturity and covenant compliance
Street analysts are not
sufficiently attentive to
the credit risk
Covenant Compliance
Covenant Secured net leverage ratio Interest coverage ratio
Less than or equal to 4.5x Greater than or equal to 2.0x
Until Jan 1, 2020 Starts Jan 1, 2018
Current 3.82x 2.36x
2018E Bull Case 4.32x 2.20x
2018E Base Case 4.49x 2.11x
2018E Bear Case 4.63x 2.05x
At risk

13
The point of no return
Assumed:
• Debt is refinanced at maturity at the same rates
• Rates are assumed to be constant to be conservative
Lower Revenues + Shrinking Margins = Compression in EBITDA
Declining LFCF + Inability to paydown debt  Increase in Net Debt
Much higher leverage
2017E 2018E 2019E 2020E 2021E
Debt Servicing
Cash Interest (approx.) 892 892 892 892 892
Levered Free Cash Flow (7) (128) (69) (180) (240)
Cash 231 103 35 (145) (385)
Net Debt (Assuming refi at same rates) 15,013 15,141 15,209 15,389 15,629
Leverage 7.6x 8.0x 8.4x 8.9x 9.5x
Projected

14
SEC Charges: Icing on the cake
Material Misrepresentations
False Medicare and Medicaid Claims
1. EBITDA and Debt Covenants
- CYH uses consolidated EBITDA in debt covenant terms. This figure went undisclosed in their 10k (November 2016).
2. Cash Reimbursement Reporting
- CYH did not disclose cash reimbursement from their implementation of record-keeping technologies (July 2013).
3. Receivables Outstanding and Material Consequences
- CYH did not disclose the balance of pending Medicaid reimbursements and their material impact on liquidity (July 2014).
4. Revenue Recognition
- Did not disclose effects of new accounting practices in relation to revenue recognition (April 2017).
Questionable Operating Segmentation
1. Operating Segment Reporting
- CYH presents 5 hospitals with separate presidents but
currently reports 2 operating segments. FASB has
questioned this.
2. Decision Making for Individual Hospitals
- CYH uses individual hospital metrics for decisions,
leading SEC to question current reporting of 2 segments.
1. Falsified increase In-Patient Admissions
- In-patient services are more expensive
- Further puts patients at risk of unnecessary procedures
2. Mispriced Claims
- CYH overvalued Medicare claims for greater
reimbursement
3. Conflation of Doctors and Compensation
- Tied financial incentives to doctor procedure referrals

15
Valuation
Short at $6.2 with target of $1.4
2018E EBITDA 2018E Multiple Implied EV Net Debt Equity Value Target Price Probability
Bull 1,960 8.0x 15,680 15,067 613 5.5 25%
Base 1,886 7.0x 13,202 15,141 (1,939) 0.0 50%
Bear 1,831 6.0x 10,986 15,195 (4,209) 0.0 25%
EV/EBITDA Valuation
Current Share Price 6.2$
Blended Implied Target 1.4$
Implied Upside/(Downside) -77.7%

16
Capitalization and Recovery
EBITDA Bridge
FY 2016 Adj. EBITDA 2,221$
+1H 2017 EBITDA 929
-1H 2016 EBITDA 1116
Capital Structure
($mm)
Rating Maturity Rate Floor Price Yield
6/31/17 $
Amount
x LTM 6/31/17
EBITDA
LTV 8.0x 6.5x 5.5x
ABL Revolver ($150mm) - 11/17 4.0% 150
ABL Revolver ($450mm) - 11/18 4.0% 450
Revolver ($261mm) Ba3/B+ 01/19 L+2.75% 4.7% -
Revolver ($739mm) Ba3/B+ 01/21 L+2.75% 4.7% -
Term G Loan ($1.6bn) Ba3/B+ 12/19 L+2.75% 1.0% 99.0 4.7% 1,331
Term H Loan ($2.9bn) Ba3/B+ 01/21 L+3.00% 1.0% 99.1 4.7% 2,440
Total 1st Lien Debt 8,471 4.2x 56.9% 100% 100% 100%
Total Senior Debt 14,596 7.2x 98.0% 100% 77% 41%
Capital leases 285
Other 62
Total Debt 14,943 7.3x 100.4%
Cash 768
Net Debt 14,175 7.0x 95.2% 15,067 15,141 15,195
Market Cap 712 613 0 0
Enterprise Value 14,887 7.3x 100.0% 15,680 13,202 10,986
* A 4% effective rate was assumed for the ABL Revolvers
Recovery under scenarios
Even unsecured notes will
not see full recovery

17
Catalysts
• In the bear case, CYH is projected to break its secured
net leverage ratio by end 2018  more severe covenants
and interest rates + investors' confidence further waning
• Not including the bear case, CYH will still come close
enough to testing covenants which will start creditor talks
Testing debt covenants
• Already divested the most saleable assets
• Rural hospitals are not attractive assets and old, which
will require high capex to improve them
Divestiture difficulties being
reported
• Continued decline in operations will expand leverage and
bring CYH further into a downward spiral
• CYH’s $15 billion in debt is not going to go away
• Interest payable alone will cripple its balance sheet
(~$1bn/yr)
Further operational decline and
leverage expansion reported in
earnings

18
Risks
• Successful divestitures of hospital above CYH’s current
multiple of 7.8x will be accretive in value and positive for
the company
Successful Divestiture Execution
• Successful repealing of ACA policies and improvements
to reimbursement under Medicare and Medicaid might
boost performance
Beneficial
Policy Change
• No matter how strong a conviction we have, the market
might stay irrational
• Mitigation: shorting CYH is not as costly since it does not
issue dividends
Positive Market Sentiment
• Even with a decline in admissions, rural communities still
need hospitals
• Mitigation: even though public officials may “keep the
lights on”, the traded entity can still be bankrupt
Rural hospitals will always be
needed

Equity Performance
5 Year
1 Year

21
Projected Financials (Base Case)
Revenue Build 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Inpatient Revenues:
Admissions 459,046 668,526 692,569 678,284 675,050 689,089 643,497 924,557 940,292 857,412 789,000 765,850 741,267 718,648 692,102
% Growth 49.1% 45.6% 3.6% -2.1% -0.5% 2.1% -6.6% 43.7% 1.7% -8.8% -8.0% -2.9% -3.2% -3.1% -3.7%
% Same Store Growth -1.1% 2.0% -1.5% -2.5% -5.6% -0.9% -7.2% -4.2% -1.8% -1.9%
Average length of stay (days) 4.2 4.2 4.2 4.3 4.4 4.4 4.4 4.4 4.4 4.5 4.5 4.5 4.5 4.5 4.5
Patient Days 1,923,547 2,835,795 2,937,194 2,891,699 2,970,044 3,000,864 2,845,281 4,091,183 4,175,214 3,832,104 3,550,498 3,446,326 3,335,703 3,233,916 3,114,457
Inpatient Rev. per Patient Day 1,880$ 2,021$ 2,160$ 2,248$ 2,207$ 2,241$ 2,297$ 2,314$ 2,313$ 2,398$ 2,386$ 2,374$ 2,363$ 2,351$ 2,339$
% Growth 7.5% 6.9% 4.1% -1.8% 1.5% 2.5% 0.7% 0.0% 3.7% -0.5% -0.5% -0.5% -0.5% -0.5%
Total Inpatient Revenues ($mm) 3,617$ 5,733$ 6,344$ 6,501$ 6,554$ 6,725$ 6,535$ 9,465$ 9,657$ 9,191$ 8,473$ 8,183$ 7,881$ 7,602$ 7,285$
% Growth 58.5% 10.7% 2.5% 0.8% 2.6% -2.8% 44.8% 2.0% -4.8% -7.8% -3.4% -3.7% -3.5% -4.2%
Outpatient Revenues:
Adjusted Admissions 842,368 1,207,756 1,275,888 1,277,235 1,330,988 1,391,456 1,337,683 1,969,770 2,038,103 1,867,348 1,718,371 1,661,842 1,602,631 1,548,086 1,485,513
Outpatient Admissions 383,322 539,230 583,319 598,951 655,938 702,367 694,186 1,045,213 1,097,811 1,009,936 929,372 895,992 861,364 829,438 793,411
% of Total Rev. as Outpatient 48.8% 47.5% 47.6% 48.5% 51.9% 54.4% 56.0% 56.1% 57.2% 56.8% 57.0% 57.2% 57.4% 57.6% 57.8%
Outpatient Rev. per admission 8,993$ 9,618$ 9,880$ 10,222$ 10,781$ 11,422$ 11,982$ 11,572$ 11,757$ 11,965$ 12,085$ 12,206$ 12,328$ 12,451$ 12,576$
% Growth 7.0% 2.7% 3.5% 5.5% 5.9% 4.9% -3.4% 1.6% 1.8% 1.0% 1.0% 1.0% 1.0% 1.0%
Total Outpatient Revenue ($mm) 3,447$ 5,187$ 5,763$ 6,122$ 7,072$ 8,022$ 8,318$ 12,096$ 12,907$ 12,084$ 11,231$ 10,936$ 10,619$ 10,327$ 9,978$
% Growth 50.5% 11.1% 6.2% 15.5% 13.4% 3.7% 45.4% 6.7% -6.4% -7.1% -2.6% -2.9% -2.7% -3.4%
Capacity:
No. of hospitals 115 121 125 127 131 129 129 197 194 155 155 155 155 155 155
Licensed beds 16,716 17,411 18,140 19,004 19,695 19,786 19,632 30,137 29,853 26,222 26,195 26,195 26,195 26,195 26,195
Average licensed beds / hospital 145 144 145 150 150 153 152 153 154 169 169 169 169 169 169
Beds in service 14,446 15,194 15,897 16,264 16,832 16,795 16,850 27,000 26,312 23,229 23,314 23,314 23,314 23,314 23,314
% of licensed beds in service 86.4% 87.3% 87.6% 85.6% 85.5% 84.9% 85.8% 89.6% 88.1% 88.6% 89.0% 89.0% 89.0% 89.0% 89.0%
Occupancy Rate 52.2% 52.3% 51.3% 50.2% 49.1% 49.1% 46.4% 43.8% 43.3% 43.1% 41.8% 40.5% 39.2% 37.9% 36.6%
No. of days in period 365 366 365 365 365 366 365 365 365 366 365 365 365 366 365
Total Revenues (bef. bad debts) ($mm) 7,064$ 10,919$ 12,108$ 12,623$ 13,626$ 14,747$ 14,853$ 21,561$ 22,564$ 21,275$ 19,704$ 19,119$ 18,500$ 17,930$ 17,262$
% Growth 54.6% 10.9% 4.3% 7.9% 8.2% 0.7% 45.2% 4.7% -5.7% -7.4% -3.0% -3.2% -3.1% -3.7%
Provision for bad debts 886 1,219 1,460 1,531 1,720 1,914 2,034 2,922 3,127 2,837 2,660 2,600 2,534 2,474 2,399
% of Revenues 12.5% 11.2% 12.1% 12.1% 12.6% 13.0% 13.7% 13.6% 13.9% 13.3% 13.5% 13.6% 13.7% 13.8% 13.9%
Net Operating Revenues 6,178$ 9,700$ 10,647$ 11,092$ 11,906$ 12,833$ 12,819$ 18,639$ 19,437$ 18,438$ 17,044$ 16,519$ 15,965$ 15,455$ 14,863$
% Growth 57.0% 9.8% 4.2% 7.3% 7.8% -0.1% 45.4% 4.3% -5.1% -7.6% -3.1% -3.4% -3.2% -3.8%

22
Projected Financials pt.2
Free Cash Flow 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Adj. EBITDA 829$ 1,523$ 1,679$ 1,755$ 1,830$ 1,981$ 1,840$ 2,716$ 2,640$ 2,221$ 1,963$ 1,886$ 1,806$ 1,732$ 1,651$
Change in Net Working Capital 244 98 88 92 37 (40) (192) (214) (818) (177) (403) (466) (349) (406) (407)
Capex (518) (679) (573) (659) (766) (763) (607) (803) (938) (729) (675) (655) (634) (614) (592)
Cash Taxes (42) 65 (57) (128) (26) (56) (73) (180) (12) 16 - - - - -
Unlevered Free Cash Flow 513$ 1,008$ 1,137$ 1,060$ 1,075$ 1,122$ 968$ 1,519$ 872$ 1,331$ 885$ 764$ 823$ 712$ 652$
Cash Interest (362) (654) (657) (651) (681) (594) (583) (831) (925) (930) (892) (892) (892) (892) (892)
Levered Free Cash Flow 151$ 354$ 480$ 409$ 394$ 528$ 385$ 688$ (53)$ 401$ (7)$ (128)$ (69)$ (180)$ (240)$
FCF Yield 2.1% 3.2% 4.0% 3.2% 2.9% 3.6% 2.6% 3.2% -0.2% 1.9% 0.0% -0.7% -0.4% -1.0% -1.4%
Levered Free Cash Flow after Acquisitions (6,757)$ 558$ 306$ 161$ 152$ 206$ 341$ (2,315)$ 45$ 1,640$ (7)$ (128)$ (69)$ (180)$ (240)$

23
Assumptions
2016 2017E 2018E 2019E 2020E 2021E
Main Revenue Drivers
Occupancy Rate 41.8% 40.5% 39.2% 37.9% 36.6%
Bull 42.1% 41.1% 40.1% 39.1% 38.1%
Base 41.8% 40.5% 39.2% 37.9% 36.6%
Bear 41.6% 40.1% 38.6% 37.1% 35.6%
Inpatient Rev. per Patient Day (Growth)-0.5% -0.5% -0.5% -0.5% -0.5%
Bull 0.0% 0.0% 0.0% 0.0% 0.0%
Base -0.5% -0.5% -0.5% -0.5% -0.5%
Bear -1.0% -1.0% -1.0% -1.0% -1.0%
% of Total Rev. as Outpatient 57.0% 57.2% 57.4% 57.6% 57.8%
Bull 57.3% 57.8% 58.3% 58.8% 59.3%
Base 57.0% 57.2% 57.4% 57.6% 57.8%
Bear 56.8% 56.8% 56.8% 56.8% 56.8%
Outpatient Rev. per admission (Growth)1.0% 1.0% 1.0% 1.0% 1.0%
Bull 2.0% 2.0% 2.0% 2.0% 2.0%
Base 1.0% 1.0% 1.0% 1.0% 1.0%
Bear 0.5% 0.5% 0.5% 0.5% 0.5%

Short Thesis on Community Health Systems (CYH)

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