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27 Jan 1997
MOODY'S ASSIGNS Ba3 TO PROPOSED $490 MILLION SENIOR SEC TERM LOAN FACILITY AND B3 TO PROPOSED $200 MILLION SR SUB NOTES OF KINDERCARE LEARNING CENTERS, INC.
New York, 01-27-97 -- Moody's Investors Service assigned a Ba3 to the proposed US$ 490 million senior secured bank loan due 2004 of KinderCare Learning Centers, Inc. and assigned a B3 rating to the company's proposed US$ 200 million senior subordinated notes due 2007 to be issued under Rule 144 A with registration rights in connection with the pending acquisition of the company by a subsidiary of Kohlberg Kravis Roberts & Co. ("KKR").
The ratings reflect substantial leverage; low fixed charge coverage and significant expansion and acquisition risk. However, the ratings are supported by the company's name recognition; stable occupancy rates and operating margins; industry expansion led by demographic growth and leading market share in fragmented industry.
The secured bank facility consists of a US$ 190 million term facility due 2004, which will be drawn at closing, and a US$ 300 million revolving credit due 2006, which will be available to fund expansion and acquisition activity. The commitment includes a US$ 25 million swing line and US$ 75 million sublimit for letters of credit. The credit facility is guaranteed by domestic operating subsidiaries and secured by a pledge of stock of 100% of the domestic subsidiaries and 65% of the foreign subsidiaries. While the facility is essentially unsecured, its structure provides some advantage to the bank creditors in liquidation. The bank facility also benefits from a cash sweep of 50% of cash flow not reinvested in business and a moderate implied asset coverage (primarily real estate) of 160% leading to a one notch rating improvement.
The B3 rating on the subordinated notes reflects its subordinated status.
The transaction will not cause any write up of assets as a major shareholder, Oak Tree, will retain its 15% stock ownership. KKR, through KCLC Acquisition, will contribute no less than $148.75 million in capital, which together with a drawdown of $176 million under the term facility, and $200 million proceeds from the notes issuance, would fund the $ 367.2 million of cash merger consideration, repay $ 122.5 in existing debt and pay $ 35 million in fees and expenses.
The pro forma balance sheet, assuming no drawdown under the revolver, is highly levered at 95% debt to book capitalization, or approximately 71% leverage if the assets had been written up. Pro forma EBITDA to interest coverage on a last twelve months basis would be 2.2 times. Significant expected capital expenditures will most likely require increasing use of the revolver for the foreseeable future thus further stressing coverage ratios.
With one third of its properties leased, the fixed charge coverage was 1.3 times on a pro forma basis for last twelve months ended December 1996. Operating revenue for the twenty-eight weeks ended December 1996, versus the same period last year, showed nearly flat operating margins which included a tuition increase offset by a decline in average occupancy rates to 74% from 75% for the comparable period last year and from historical levels of 76%. The company believes the decline was due to recently introduced initiatives which it will review, including reduced, lower-cost marketing, expanded discounted employee childcare and less direct management supervision of centers. Historically, the company has maintained stable capacity utilization by closing less profitable locations and focusing expansion and renovation efforts in higher income real estate markets. Stable capacity and higher than inflation price increases have attributed to historically stable EBITDA margins despite marginally lower unit volume. `
KinderCare Learning Centers, Inc., based in Montgomery, Alabama, is the largest for profit preschool and child care company in the United States. The company, founded in 1969, emerged from a pre-packaged bankruptcy in March 1993.
No Related Data.
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