Gentiva Health: Junk Bonds Yield 12%

| About: Gentiva Health (GTIV)

Gentiva Health Services Inc. (NASDAQ:GTIV) specializes in home health and hospice care. In November 2010, after purchasing Odyssey Healthcare for nearly $1 billion, Gentiva offered $325M in 8-year bonds with an 11.5% coupon. In September 2011 Zacks Equity Research reported that investors were suing Gentiva.

...shareholders of Gentiva contend that the management of the company issued a series of false and misleading financial statements from July 31, 2008 onwards, to drive up the share value of the company.

The complaints further claim that management overstated the in-home therapy visits to patients with the intention of generating higher Medicare reimbursement rates for Gentiva and failed to disclose the same to the investors.

There is currently a large quantity of Gentiva's 2018 corporate bonds on the secondary market. The current offer has a minimum purchase quantity of 5 bonds and there are 1,480 available.

credit rating price yield
Gentiva Health Services Inc Sr Nt 11.5% 2018 (cusip: 37247AAB8) Cond Put Change of Control, Cont Call 09/01/2014@105.75, Cond Call, Make Whole Call, sinking fund protection Caa2/CCC 97.45 12.11%

The bond's call features are as follows:

Call Defeased No
Continuously Callable Yes
Call Dates
09/01/2014 105.75
09/01/2015 102.87
09/01/2016 100.00

With a minimum purchase quantity of 5 bonds an investor must put down $4872.50, or simply look for an offer with a lower minimum purchase quantity. The Gentiva bonds' next semi-annual coupon should be on 03/01/2013 for $57.50 per bond.

Gentiva Corp. Bond Performance

In the past month the Gentiva 11.5% 2018 bonds have traded between $96.00 and $97.55. The Financial Industry Regulatory Authority's price chart shows Gentiva's junk bonds have gone up over 20% in the past 52-weeks:

A 20% gain may have current bondholders profit taking, including income funds like John Hancock Income Securities Trust (NYSE:JHS). Earlier this year John Hancock held 70,000 Gentiva 11.5% 2018 bonds, however appears to have sold them all.

On November 13, 2012 S&P maintained Gentiva's B- corp. credit rating and raised the company's rating outlook from stable to positive. S&P left Gentiva's unsecured debt rating at CCC:

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...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...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.

John Hancock Divested From Gentiva 11.5%

There are a few income funds that have held Gentiva's 2018 bonds, including John Hancock Income Securities Trust. To put the John Hancock fund into perspective I will compare it to New America High Income (NYSE:HYB), which currently holds no Gentiva debt.

The John Hancock Income Securities Trust keeps 30% in BBB rated bonds and 7% in CCC rated bonds. The Trust keeps 44% in corp. bonds and 22% in US government securities. The average annual total returns are as follows:

NAV 16.18% 16.57% 14.28% 9.99% 7.98%
MKT 19.14% 19.95% 17.23% 13.59% 9.45%

Recent distributions are as follows:

Ex Date Pay Date Reinvestment Price Distribution
9/12/12 9/28/12 $16.39 $0.253
6/7/12 6/29/12 $14.97 $0.272
3/8/12 3/30/12 $14.91 $0.263
12/8/12 12/30/12 $14.33 $0.304
9/8/11 9/30/11 $14.36 $0.289
6/9/11 6/30/11 $14.79 $0.274

The John Hancock Income Securities Trust's price has a similar trend to New America High Income's price:

JHS Chart

JHS data by YCharts

New America High Income's top ten holdings as of September 30, 2012 are:

Issuer % of Fund
Sirius XM 144A (NASDAQ:SIRI) 8.75% 0.86%
Sprint Nextel 144A (NYSE:S) 9% 0.83%
CDW 12.535% 0.78%
Joseph T Ryerson Inc 144A 11.25% 0.74%
CIT Group (NYSE:CIT) Inc 144A 5.5% 0.72%
Ford Motor (NYSE:F) Credit 5% 0.67%
Intelsat Bermuda LTD 11.25% 0.67%
Commscope Inc 144A 8.25% 0.66%
Inivision Communications 144A 7.875% 0.65%
Intl Lease Finance Corp 8.875% 0.65%

Note: A 144A is "a SEC rule modifying a two-year holding period requirement on privately placed securities to permit qualified institutional buyers to trade these positions among themselves."

While $4,872 would buy 5 Gentiva bonds, it could also provide exposure to far more companies through the CEFs.

quantity price / total yield
Gentiva 11.5% 2018 5 $97.45 / $4,872 12.11%
John Hancock Income Securities Trust 300 $16.25 / $4,872 6.25%
New America High Income 462 $10.53 / $4,872 7.6%

The Gentiva bonds yield more, however, the CEFs balance multiple corp. bonds and offer exposure to higher credit ratings. The New America High Income Fund currently pays a monthly dividend, whereas the John Hancock Trust pays a quarterly dividend. Though the John Hancock fund no longer holds Gentiva's bonds, investors may look to it for guidance.

Gentiva's Competition

Amedisys (NASDAQ:AMED) is based in Louisiana, the company provides health and hospice services. Amedisys and Gentiva both have around $300M market capitalizations. Amedisys' net income is outpacing Gentiva's, however the two health and hospice care companies have similar trends:

GTIV Net Income TTM Chart

GTIV Net Income TTM data by YCharts

In April 2011 Amedisys bought Beacon Hospice for $125M; currently Amedisys has $32M in cash [mrq] and $122M in debt.

GTIV Debt to Equity Ratio Chart

GTIV Debt to Equity Ratio data by YCharts

A class action lawsuit was filed against Amedisys in July 2012. Former employees allege the company did not properly compensate nurses for overtime work. In the past 6 months institutions have sold 10.5M shares of Amedisys; this represents a -85% change in institutional ownership.

Though Gentiva and Amedisys are purchasing smaller hospice centers they are experiencing difficult times. The companies are engaged in labor intensive work that requires skilled technicians. The top four employees at Gentiva are paid $2.5M, the top four Amedisys employees are paid about $1.9M.

Institutions Divesting From Gentiva

In the past 6 months institutional investors have sold 11.4M shares of Gentiva stock; this represents a -87% drop in institutional ownership. Though investors have sued the company, and institutions have run for cover, Gentiva has continued to buy up smaller hospice centers. In July 2012 Gentiva bought Advocate Hospice based out of Danville, Indiana. In September 2012 Gentiva bought North Mississippi Hospice.

Gentiva revealed that it will finance the purchase from its cash reserves. The transaction is unlikely to materially affect Gentiva's earnings in the future. However, it will significantly expand the company's presence in the Northern Mississippi market as North Mississippi Hospice has branches in Tupelo...

Gentiva is currently leaning heavily towards hospice, while sustaining the base Gentiva Home Health services. The company's website shows there are several Gentiva home health offices in over 400 communities. Here are comparisons for New York, California, Florida and Texas:

Gentiva Hospice Gentiva Health Care
New York 0 8
California 9 9
Florida 12 32
Texas 32 4

According to American Medical News:

The average length of stay in hospice care decreased to 67.4 days, down from 69.5 in 2008, according to... National Hospice and Palliative Care Organization, which represents about two-thirds of the nation's more than 5,000 for-profit and nonprofit hospices.

The US Dept. of Health and Human Services' Medicare Learning Network states the cap on payment for hospice services is $25,377 and the hourly rate for 24 hour care is $37.32, for 2013.

Investing in Junk Bonds

The Gentiva bonds offer a risky 12% yield, however, could be worth considering, if funded with profit from other positions and fixed income generated by higher quality corp. bonds. For instance an investor who has $1,000 of profit elsewhere, and $2,500 fixed income being generated every 3 months, might consider the potential for a 12% yield to be acceptable.

Gentiva's most recent financial statement shows a decrease in total assets and a decrease in total long-term debt.

Sept. 30, 2012 Dec. 31, 2011
cash / cash equivalents $156.0M $164.9M
total current assets $475.9M $520.3M
current portion of long-term debt $21.6M $14.9M
accrued nursing home costs $20.5M $24.2M
long-term debt $916.4M $973.2M

Though Gentiva has expanded, the company has seen a decrease in net revenue:

For 9 months ended

Sept. 30, 2012

For 9 months ended

Sept. 30, 2011

net revenues $1.28B $1.34B
cost of services $679.4M $707.8M
selling / admin. $608.3M $641.7M
net income (loss) $18.8M ($454.6M)
repayment of long-term debt ($50M) ($43.4M)

Diversified Exposure to High Yield

Here are some example positions for three different portfolios. The examples will include a Goldman Sachs (NYSE:GS) bond position for exposure to better credit quality, in addition to John Hancock Income Securities Trust and New America High Income CEF positions:

portfolio size Gentiva 11.5% 2018 Goldman Sachs 6% 2033 (cusip: 38141ER92) price: 109.27 yield: 5.27% John Hancock Income Securities / New American High Income total / %
$250,000 1,000 2,225 500 / 500 4,225 / 4.2%
$1M 2,000 5,500 1,250 / 1,250 10,000 / 1%
$10M 5,000 11,000 3,500 / 3,500 23,000 / 0.23%

Clearly Gentiva leaves a lot to be desired for investors, foremost their Caa2 credit rating. Investors who bought the 11.5% coupon 2018 bonds at greater discounts have done well, and it is possible the bonds could continue to do well. What remains to be seen is whether Gentiva will be able to jump the debt hurdles it has created, by generating more revenue and income.

If you have any thoughts regarding Gentiva's junk bonds please leave a comment below.

Disclosure: I am long HYB. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am long Goldman Sachs bonds, I am considering both Gentiva's 2018 corp. bonds and John Hancock Income Securities Trust, and may initiate long positions. This article is not a recommendation to buy or sell, please consult a financial adviser to determine proper allocations, if any to high yield bonds.

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