Gentiva Ratings Outlook Slashed on Weak Q4 - Analyst Blog

Moody's Investors service, the credit rating wing of Moody's Corporation MCO, has recently downgraded the rating outlook on Gentiva Health Services, Inc. GTIV to negative from stable. These ratings include the Corporate Family Rating CFR of “B3”, Probability Default Rating (PDR) of “B3–PD” and speculative grade liquidity rating of “SGL–3” which were also affirmed.

Gentiva's dismal fourth-quarter 2013 financial results and the rating agency's projection of continued challenges from unfavorable industry headwinds and operating missteps impelled Moody's to lower the outlook. Gentiva reported a loss of 14 cents per share as against an income of 30 cents in the year-ago period, mainly due to a continued weak hospice business.

Moreover, the company suffered from delays in recognizing synergies from the Harden acquisition that was culminated in Oct 2013. Moody's outlook downgrade takes into account this vast magnitude of earnings decline and an 18% decline in adjusted EBITDA.   

Additionally, the credit rating agency stated that given the reimbursement risk from Medicare, revenues and EBITDA in the hospice business are likely to decline in the upcoming period, thereby pressurizing earnings. The weak fourth-quarter results dampened Gentiva's credit metrics for Moody's B3 ratings.

Coming to the affirmation of ratings, Moody's confirmed the B3 CFR in expectation of significant expense savings from the Harden buyout that will help Gentiva offset the negatives in the hospice business going forward. Moreover, the home health segment is also expected to help the company stabilize earnings in 2014.

Moody's also had an optimistic view on Gentiva's liquidity profile (expecting a modest free cash flow in the upcoming period) that prompted it to affirm the SGL–3 ratings. Nevertheless, the rating agency is cautious about EBITDA declines in the future that might weigh on the company's liquidity position.

Moody's discarded the possibility of an upgrade in the ratings in the near term due to unfavorable industry pressures that are likely to persist. However, in the long-run if Gentiva's financial performance or profit margins improve, with positive cash flow sustained along with a debt-to-EBITDA ratio of 5x or less, the company is likely to witness an upgrade in ratings from Moody's.

On the other hand, a downgrade in the ratings is likely for liquidity weakness, failure to maintain positive free cash flow or a significant deterioration in the company's financial leverage (debt-to-EBITDA at above 6x). Significant rate cuts and volume pressure, and an adverse impact of the pending litigations might also invite a ratings downgrade.

Rating or outlook downgrades from credit rating agencies are detrimental to company's goodwill and weakens investor confidence and creditworthiness of the stock.

Gentiva currently carries a Zacks Rank #5 (Sell). Some better-ranked stocks in the healthcare services space include Chemed Corp. CHE and China Cord Blood Corp. CO. While Chemed sports a Zacks Rank #1 (Strong Buy), China Cord carries a Zacks Rank #2 (Buy).