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Gentiva Health Services Inc. (GTIV - Analyst Report) has been on an uptrend since the past one month, reflecting investors’ confidence about its developments so far.

Among others, Moody’s Investor Service, the credit ratings agency of Moody’s Corp. (MCO - Analyst Report) assigned “B2” debt ratings to the proposed first lien senior secured credit facilities worth $955 million of Gentiva. Additionally, Moody’s affirmed the existing Corporate Family Rating (CFR) at “B3”, Probability Default Rating (PDR) at “B3–PD” and speculative grade liquidity rating of “SGL–3”. All the above ratings carry a stable outlook.

Gentiva intends to use the proceeds of the $955 million issuance to partially finance (approximately $239 million) its $408.8 million acquisition of Harden Healthcare Holdings Inc. that was announced on Sep 19, 2013. The proceeds will also be used to refinance Gentiva’s existing credit facilities and expenses related to the acquisition. Thus once the final documentation is completed, Moody’s will review the assigned debt ratings of “B2”.  

The “B3” CFR came on the back of the earnings vulnerability of Gentiva as it faces intense industry challenges cropping up from reimbursement rate cuts from Medicare in the home health sector and dependence on government related payors. The rating also takes into account Moody’s 5.5–6.5 times debt-to-EBITDA expectation regarding Gentiva’s financial leverage as EBITDA deteriorates with anticipated rate cuts. However, Moody’s is of the opinion that the home health segment’s volume growth and benevolent reimbursement outlook for the hospice sector might somewhat mitigate the earnings pressure. Also Gentiva’s favorable scale, geographic diversity and market leading position in home health and hospice were given a positive rating consideration by Moody’s. The SGL–3 ratings by Moody’s came on the back of Gentiva’s strong liquidity portfolio.

The stable outlook came on the back of Moody’s expectation that Gentiva will likely integrate Harden’s acquired business and focus on cost curbing measures over the next several years. Gentiva’s ability to offset the impact of an EBITDA reduction in the next few years and generate positive free cash flow thereby reducing debt is also reflected in the ratings.

However, the ratings can be subject to a downgrade if Gentiva’s liquidity weakens or if the company fails to maintain positive free cash flow or there is a material deterioration in the financial leverage of the company. Moody’s also stated that a ratings upgrade is unlikely in the short run as the unfavorable industry pressures from rate cuts that are expected to persist for several years might mar the company financials in the near term.

Rating affirmations or upgrades from credit rating agencies play an important part in retaining investor confidence in the stock as well as maintaining creditworthiness in the market. We believe that Gentiva’s present score with the credit rating agency will help it write more business going forward.

With respect to its earnings performance, Gentiva delivered positive earnings surprises in 2 of last 4 quarters. However, this Zacks Rank #3 (Hold) home health and hospice services provider has not seen any estimate revisions over the past few weeks and the Zacks Consensus Estimate for the third-quarter 2013 has remained unchanged at 22 cents. The latest price appreciation is certainly encouraging, but a near term investment on the stock is doubtful.

Other stocks in the healthcare industry that are worth considering are LCA-Vision Inc. with Zacks Rank #1 (Strong Buy) and Amsurg Corp. (AMSG - Analyst Report) with a Zacks Rank #2 (Buy).

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