On Tuesday, Gentiva Health Services Inc. announced an amendment to its senior secured credit agreement to make the financial covenants more flexible for the remaining period of the credit facility. The amendment consists of alteration of the definition of consolidated EBITDA (earnings before interest, taxes, depreciation and amortization) in the credit agreement.
Consequently, all expenses related to Gentiva’s cost realignment initiative, certain non-recurring cash charges and legal settlements will be added back during the calculation of consolidated EBITDA. Additionally, the maximum limit for the consolidated leverage ratio has been raised to 6.25:1.00 for the period from January 2012 to September 2014 and 5.75:1.00 subsequently. The previous limit was 4.50:1.00 till September 2012, 3.75:1.00 from October 2012 to September 2013 and 3.00:1.00 beyond that.
Further, the minimum interest coverage ratio requirement has been relaxed to 2.00:1.00 for the period from January 2012 to June 2013, 1.75:1.00 from July 2013 to June 2014 and 2.00:1.00 from July 2014 onwards. Moreover, the definition of consolidated interest charges has been modified to exclude non-cash interest charges, which were previously included.
The amendment also hiked the interest rates on the term loans taken under the credit facility by 1.75% per annum. Thus, the new rates applicable on the Eurodollar term loans A and B are 6.25% and 6.50%, respectively.
Additionally, Gentiva is now allowed to make discounted prepayments of outstanding term loans through a Dutch auction process. However, the company will have to pay various fees relating to the amendment, one of them being a consent fee of about 0.50% of term loans and revolving credit obligations under the credit agreement. This consent fee will be paid to all lenders who give their consent to the amendment.
Gentiva also repaid $50 million of its principal outstanding under term loans A and B on a pro rata basis and downsized its revolving credit facility to $110 million from $125 million. The company is implementing a two-pronged strategy to increase the flexibility of its financial covenants over the next few years in an effort to better reflect the changed reimbursement environment. The amendment of the credit facility is the second part of the strategy.
Gentiva is a leading national provider of comprehensive home health services and competes with organizations like Amedisys Inc. (AMED - Free Report) and Lincare Holdings Inc. .
Shares of Gentiva currently carry a Zacks #2 Rank, implying a short-term Buy rating. Considering the fundamentals, we maintain our long-term Neutral recommendation on the shares.