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Rating Action:

MOODY'S ASSIGNS Ba3 RATING TO KINDERCARE LEARNING CENTERS' $125 MILLION REVOLVING CREDIT FACILITY

03 Jun 2003
MOODY'S ASSIGNS Ba3 RATING TO KINDERCARE LEARNING CENTERS' $125 MILLION REVOLVING CREDIT FACILITY

Approximately $775 Million of Debt Securities Affected

New York, June 03, 2003 -- Moody's Investors Service has assigned Ba3 to Kindercare Learning Centers' $125 million senior secured revolving credit facility and confirmed existing ratings. The ratings reflect the company's high leverage, competitive environment, and the challenging economic environment as well as diversified revenue base and its position as the largest childcare provider in the United States.

Moody's Investors Service assigned ratings (subject to review of final documentation) to Kindercare Learning Centers ("Kindercare") as follows:

$125 million proposed Senior Secured Revolving Credit Facility assigned a Ba3

Moody's has confirmed the following ratings:

$50 million Senior Secured Term Loan B, rated Ba3

$300 million Senior Subordinated Notes, rated B3

Senior Implied, rated B1

Issuer Rating, rated B2

Moody's will withdraw the following rating upon completion of the transaction:

$300 million Senior Secured Revolver, rated Ba3

The rating outlook is stable.

The ratings reflect the company's positioning as the largest provider of early childhood education and care services in the United States and its expansive reach that allows for regional diversification and strong brand recognition. The company's revenues are derived from providing services to families of over 130,000 children who pay approximately $140 per week on average to have Kindercare attend to their children. The company franchise has been reasonably stable and has been in demand as evidenced by the company's historical ability to raise rates faster than inflation.

The ratings also reflect the company's high leverage, challenging occupancy trends, and the ongoing impact of a difficult economic environment. Of these, the economy is the largest concern because the weaker the economy the more difficult it becomes to raise rates in order to offset occupancy declines. Additionally, the weak economy may lead more families to consider other childcare alternatives.

The Ba3 rating on the proposed revolving credit facility considers the collateral package. Security includes a perfected first priority pledge of and security interest in all the capital stock of each existing and each subsequently acquired or organized domestic subsidiary of the borrower and each material direct foreign subsidiary of the borrower, limited to 65% of the capital stock of the foreign subsidiary. Additional collateral comes from approximately $130 million in estimated market value of certain real estate assets that have a book value of approximately $65.8 million. Proceeds from any sale leaseback transactions and excess cash flow may be used to repurchase senior subordinated notes if the aggregate amount of loans outstanding under the facility does not exceed $25 million. If assets representing the collateral are sold they must be replaced with property of an equivalent fair market value or the amount of the revolving credit commitment must be permanently reduced by an amount at least equal to the fair market value of the asset sold. The senior credit facility's Ba3 rating is notched above its Senior Implied rating to reflect the tangible security. The rating of the Senior Subordinated notes reflects their subordination and priority of claim in the company's capital structure.

The stable outlook reflects the belief that the company's performance should be reasonably stable under most scenarios. Kindercare has the flexibility, should a more severe downturn in the market occur, to reduce the number of new center builds or to reduce its rates to stimulate occupancy levels. The company could also sell non-collateralized real estate as an additional form of financing and to supplement cash flows. The use of proceeds from the sale of real estate or other financings would be important in determining its effect on the ratings. The ratings could be negatively affected if occupancy levels were to deteriorate significantly and the company was unable to offset this decline with higher fees. The ratings could also come under pressure if the company does not receive adequate returns on its relatively large capital expenditure program. The ratings could improve if the company reduces leverage significantly or if the company was to experience significantly higher occupancy levels.

For projected FYE 2003 total debt to EBITDA is estimated at 4.3x and senior debt to EBITDA is projected at 2.45x. Proforma EBITDA coverage of interest is estimated at 3.1x while proforma EBITDA less capital expenditures over interest is only around 1.1x.

Kindercare Learning Centers, Inc., headquartered in Portland, Oregon, is the leading for-profit provider of early childhood education and services in the United States. At April 18, 2003, Kindercare operated a total of 1,268 childcare centers and served approximately 132,000 children and their families in 39 states. Kindercare also operates 2 centers in the United Kingdom.

New York
Mark Gray
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Paul Aran
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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