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Related Issuers
Rating Action:

Moody's affirms CrownNewCo's (Priory) B1 CFR ratings, Senior Secured Notes rating downgraded to (P)B1, outlook changed to negative

04 Apr 2011

Frankfurt am Main, April 04, 2011 -- Moody's Investors Service today affirmed the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of CrownNewCo (a.k.a. Priory, "the company") at B1 following the announcement that the company intends to acquire Craegmoor Group Limited ("Craegmoor"), an entity owned by Priory's shareholder Advent International, for a total consideration of GBP330 million. The outlook was changed to negative from stable.

Concurrently, Moody's affirmed the (P)Ba1 (LGD1,1%) rating of Priory's GBP70m Super Senior Revolving Credit Facility as well as the (P)B3 (LGD6, 91%) rating of the GBP175 million Senior Unsecured Notes. The rating of the company's Senior Secured Notes, which will increase to GBP631 million from currently GBP425 million in the context of the proposed acquisition, was downgraded to (P)B1 (LGD3, 42%) from (P)Ba3.

The ratings are contingent upon the closing of the announced acquisition and the successful issuance of GBP206 million of additional debt to repay the existing debt at Craegmoor as well as other transaction related cost. Furthermore, Advent International, the ultimate shareholder of both Priory and Craegmoor, will inject its equity holding in Craegmoor valued at GBP124million as common equity into the combined group. There will be no dividend or similar payments to Advent or its subsidiaries in the context of this transaction.

Moody's issues provisional ratings in advance of the final sale of securities and these reflect the rating agency's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavour to assign definitive ratings to the instruments mentioned above. A definitive rating may differ from a provisional rating, for example due to a different amount of total debt at closing or changes to the underlying terms and conditions of the instruments.

RATINGS RATIONALE

The rating affirmation reflects Moody's view that the acquisition of Craegmoor for an enterprise value of GBP330 million should be relatively neutral to Priory's financial risk profile, which however will be weak for the B1 rating category following the acquisition of the group by Advent in January 2011 and the arrangement of sale-and leaseback transactions in the end of 2010. In addition, we believe that the contemplated acquisition of Craegmoor improves the group's business profile through a larger scale, better market positioning and broader service offering. At the same time, however, Moody's notes a certain level of integration risk associated with a transaction of this size and within the highly regulated environment of the UK healthcare market.

With 2010 expected revenues of around GBP156 million, Craegmoor will add substantial scale to Priory's existing operations, which generated approximately GBP300 million of revenues in the same period. In Moody's view, the acquisition of Craegmoor will strengthen the company's market positioning within the learning disabilities sector where Craegmoor is the market leader in the UK, and within the elderly care business where Craegmoor already has an established business platform with a focus on older people with dementia and those requiring nursing care.

While Moody's notes the risks associated with integrating such a relatively large entity, we acknowledge the potential benefits of an enlarged scale of the group in particular in light of regulatory changes that will be effective from 2013 onwards. As General Practitioners will going forward directly refer patients, Moody's believes that the company's broader service offering along the care pathway and consequently its ability to offer integrated service packages could prove to be beneficial. Further, both entities have grown through a number of acquisitions and thus gained experience in integrating assets, as for instance highlighted by the acquisition of the Affinity group by Priory in March 2010.

While Craegmoor exhibits, due to the nature of its service offerings, lower profitability levels than Priory, the company's pro forma leverage of approximately 6.0x adjusted debt/EBITDA is slightly lower than the 6.9x pro forma adjusted debt/EBITDA leverage expected for Priory on a stand-alone business. Following the primarily debt-financed acquisition and incorporating incremental synergies which Priory expects to realize within six months after closing, the combined group should reach a leverage comparable to Priory stand-alone. In this context, Moody's notes the impact from Priory's operating lease activities, which based on 2010 results led to a debt adjustment which was higher than expected in January (expected adjusted leverage of 6.3x debt/EBITDA), when we assigned the rating. Consequently, Priory is showing a higher than initially expected leverage with, however a reasonably fast pace of deleveraging that will depend on the successful integration of Craegmoor and the realization of cost synergies. The significant increase in leverage due to the sale-and-leaseback transactions together with the challenging integration for realization of projected cash flows led to a change in outlook to negative from stable.

The B1 rating assumes that Priory will be able to improve its credit metrics towards the requirements for the B1 rating category, as exemplified by an adjusted debt/EBITDA ratio trending towards 5.0x by 2012. The B1 rating assumes furthermore that (i) Priory will successfully integrate the acquired Craegmoor business and achieve targeted synergies within a short period of time, (ii) the combined group will preserve a sufficient liquidity cushion (supported by positive free cash flow generation); and (iii) the company will not make any further transforming acquisitions or shareholder distributions.

The downgrade of the Senior Secured Notes rating to (P)B1 from (P)Ba3 is in line with Moody's Loss Given Default Methodology and reflects the sizable increase of senior secured debt within the capital structure while the senior unsecured debt portion, which would carry the first loss in a default scenario, remains unchanged.

Moody's understand that the security package which is currently in place for Priory's Senior Secured Revolving Credit Facility and the Senior Secured Notes will be extended to also cover the majority of Craegmoor's assets so that the total percentage of group assets pledged should remain broadly unchanged. Furthermore, Moody's assumes that Craegmoor and its subsidiaries will become additional guarantors under the Revolving Credit Facility as well as the Senior Secured and Unsecured Notes. We understand that a minimum group asset and EBITDA coverage of 85% under the guarantees will remain in place. Any material changes relating to these key assumptions could prompt the agency to review the instrument ratings. Moody's also assumes that the existing GBP70 million Senior Secured Revolving Credit Facility will remain in place and is expected to be undrawn after the closing.

Downgrades:

..Issuer: Crown NewCo 3

....Senior Secured Regular Bond/Debenture Feb 15, 2018, Downgraded to (P)B1 from (P)Ba3

....Senior Secured Regular Bond/Debenture Feb 15, 2018, Downgraded to LGD3, 42 % from LGD3, 40 %

....Senior Unsecured Regular Bond/Debenture Feb 15, 2019, Downgraded to LGD6, 91 % from LGD5, 88 %

Outlook Actions:

..Issuer: Crown NewCo 3

....Outlook, Changed To Negative From Stable

Negative pressure could be exerted on the rating in the event of (i) Priory failing to improve its debt/EBITDA ratio to well below 6.0x over the next several quarters; or (ii) increasing margin pressure resulting from changes in the UK regulatory healthcare framework or competitors offering aggressive rates.

A positive rating action is currently unlikely. An upgrade would require a sustained period of maintaining profitability and cash flow generation at a high level, with a subsequent reduction in leverage, such that Priory's adjusted debt/EBITDA ratio improves to below 4.5x.

The principal methodology used in this rating was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Priory is the largest independent provider of high-acuity mental health care, specialist care and education services in the UK, offering a broad range of services in the field of acute psychiatry, secure, long-term rehabilitation and specialist education markets. Priory revenues for 2010 are expected to reach approximately GBP300 million.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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Please see ratings tab on the issuer/entity page on Moodys.com for the last rating action and the rating history.

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Frankfurt am Main
Sabine Renner
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Corporate Finance Group
Moody's Deutschland GmbH
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Moody's affirms CrownNewCo's (Priory) B1 CFR ratings, Senior Secured Notes rating downgraded to (P)B1, outlook changed to negative
No Related Data.
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