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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on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
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and issued with no amendment resulting from that disclosure.
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Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
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Moody's considers to be reliable including, when appropriate,
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Please see ratings tab on the issuer/entity page on Moodys.com
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Frankfurt am Main
Sabine Renner
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Frankfurt am Main
Matthias Hellstern
Senior Vice President
Corporate Finance Group
Moody's Deutschland GmbH
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SUBSCRIBERS: 44 20 7772 5454
Moody's Deutschland GmbH
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Frankfurt am Main 60322
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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