-- Atlanta-based home health and hospice services provider Gentiva Health
Services Inc. has improved adjusted EBITDA margins by more than 400
basis points to more than 12% from 8% during the same period a year ago.
-- The company also generated free operating cash flow (FOCF) of $65
million for the nine months ended Sept. 30, 2012.
-- We are affirming our 'B-' corporate credit rating and revising the
outlook to positive from stable.
-- Our positive outlook reflects our expectation that Gentiva will manage
a marginal 2013 home health rate cut and will sustain improved margins,
contributing to positive FOCF in 2012 and 2013.
On Nov. 13, 2013, Standard & Poor's Ratings Services revised the 'B-' rating
outlook on Gentiva Health Services Inc. to positive from stable. At the same
time, we affirmed our 'B-'corporate credit rating on the company. The positive
outlook reflects our expectation for steady EBITDA margins and continued free
operating cash flow generation.
Our ratings on Atlanta-based Gentiva Health Services Inc. reflect the
company's "vulnerable" business risk profile, based on its significant
reliance on Medicare payments that continue to be under pressure, particularly
in the home health sector. The ratings also reflect the company's "highly
leveraged" financial risk profile, arising from the $1 billion debt-financed
acquisition of hospice provider Odyssey Healthcare in 2010.
As expected, operating environment trends remain negative for the nine months
ended Sept. 30, 2012, reflecting Medicare reimbursement changes for home
health that went into effect on Jan. 1, 2012. Year-to-date revenues declined
5%, trending slightly above our expectations for a 6% decrease. However,
despite contracted revenues, Gentiva continues to boost EBITDA margins.
Adjusted EBITDA margins improved to more than 12% from 8% a year ago. We
believe the company will sustain improved margins through the end of the year
and throughout 2013, despite another marginal 2013 Medicare rate cut of 0.4%
to home health services and possible sequestration that would begin in 2013
(2% across the board rate cut). The company should benefit from a 0.9%
increase in rates for hospice in 2013 and relaxing the physician participation
requirements for home health reimbursement. Our 2013 expectations assume these
rate cuts will be partially offset by the increase in rates in hospice and
episodic admission growth.
The year-to-date margin improvement has exceeded our expectations for a
decrease in margins of 100 basis points (bps) for full-year 2012. Management's
ability to cut costs from a recent restructuring and branch closings was more
successful than we anticipated. However, EBITDA margins still remain below
peak levels of 14%. Stronger earnings and improved collections have
contributed to the company turning free operating cash flow (FOCF) positive,
generating about $65 million of cash so far in 2012. Our base-case assumptions
now project the company to generate EBITDA of about $170 million in 2012 and
2013, and FOCF ranging from $90 million to $100 million annually, absent
Gentiva's vulnerable business risk profile incorporates the company's heavy
exposure to Medicare reimbursement that contributes about 85% of total
revenues. While significant exposure to reimbursement risk has always been a
key component of our view of Gentiva's business risk profile, recent changes
to home health reimbursement have escalated its significance to the rating.
The company faced a rate cut of about 5% in 2011 and an additional 2.3% cut in
2012, and faces possible sequestration in 2013. Additionally, there is further
uncertainty on how Medicare will reimburse for home health when rebasing of
rates becomes effective in 2014; when Medicare will reset the rates and change
how Center for Medicare and Medicaid Services reimburses for home health
services. The methodology for rebasing has yet to be determined, but we assume
it will result in further reimbursement reductions. Hospice, the company's
other business segment, diversifies some of the company's business risk.
Continued uncertainty of the final outcome stemming from the Senate Finance
Committee investigation in suspicious reimbursement practices also weighs on
Gentiva's vulnerable business risk profile. The past reimbursement billing
practices of all publicly traded home health agencies were subpoenaed for
further review; while a report has been released, the outcome of whether a
possible fine will be assessed is still unknown.
Gentiva's highly leveraged financial risk profile is characterized by
lease-adjusted debt to EBITDA of more than 5x and funds from operations to
debt below 12% as of Sept. 30, 2012. Our base-case assumptions expect leverage
to remain relatively unchanged in the near term. Despite recent EBITDA
improvement, we still expect leverage to be close to 5x in 2012 and 2013.
We view Gentiva's liquidity as "adequate." We believe sources of cash are
likely to exceed mandatory uses over the next two years. Our assessment of the
company's liquidity profile incorporates the following expectations and
-- We expect sources of liquidity will exceed uses by 1.2x or more.
-- Sources include more than $150 million of cash reserves, about $65
million of availability on its $110 million revolver after outstanding letters
of credit, and FOCF that we now project to range from $90 million to $100
million annually in 2012 and 2013.
-- Uses include capital expenditures of less than $25 million annually,
and an upfront principal payment on the company's term loan of $50 million
that was made in connection with a credit agreement amendment.
-- We expect sources will still exceed uses, even if EBITDA declines by
-- We expect the debt covenant cushion on bank-calculated debt to EBITDA
and interest rate coverage covenant to be at least 20%.
-- We expect the company will have limited availability to absorb
low-probability, high-impact events with existing liquidity.
The issue-level rating on the company's credit facility, which includes a $180
million term loan A, $550 million term loan B, and a $110 million revolver, is
'B'. The recovery rating on the credit facility is '2', indicating our
expectation for substantial (70% to 90%) recovery of principal in the event of
The issue-level rating on the $325 million senior unsecured notes is 'CCC',
with a recovery rating of '6', indicating our expectation for negligible (0%
to 10%) recovery of principal in the event of payment default. For the
complete recovery analysis, please see the recovery report on Gentiva,
published May 21, 2012, on RatingsDirect.
Our positive rating outlook reflects our expectation that Gentiva will be able
to manage through a marginal 2013 home health rate cut and sustain improved
margins to aid in continued generation of FOCF. We expect cost-containment
measures to partially mitigate ongoing revenue declines and that headroom
under revised covenants will continue to exceed 20%. We could raise the rating
on Gentiva if the company continues to demonstrate resilience during a
difficult reimbursement environment and further establish its track record of
steady EBITDA margins and free cash flow generation.
We could revise our outlook to stable or lower the rating if the company's
operations are further jeopardized as a result of adverse developments in
Medicare reimbursement, affecting liquidity and resulting in a possible breach
of amended covenants.
Related Criteria And Research
-- Criteria For Assigning 'CCC+', 'CCC', 'CCC-', And 'CC' Ratings, Oct.
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings Affirmed; Outlook Revised
Gentiva Health Services Inc.
Corporate Credit Rating B-/Positive/-- B-/Stable/--
Senior Secured B
Recovery Rating 2
Senior Unsecured CCC
Recovery Rating 6
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
www.standardandpoors.com. Use the Ratings search box located in the left