First time issuer / GBP600 million to be issued
Frankfurt am Main, January 24, 2011 -- Moody's Investors Service has today assigned a B1 corporate family
rating (CFR) and probability-of-default rating (PDR) to
Crown NewCo 3 plc ("Crown NewCo" or "the company"),
an entity beneficially owned by private equity investor Advent International.
Concurrently, Moody's has assigned provisional ratings to
the company's proposed issuance of GBP425 million worth of senior
secured notes (rated (P)Ba3) due in 2018 and GBP175 million worth of senior
unsecured notes (rated (P)B3) due in 2019. In addition, the
rating agency has assigned a rating of (P)Ba1 to the company's GBP70
million senior secured revolving credit facility maturing in 2017.
The rating outlook is stable. This is the first time that Moody's
has rated Crown NewCo.
The ratings are contingent upon Crown NewCo's success in closing
its proposed acquisition of Priory Investment Holdings Limited ("Priory"),
which is subject to regulatory approval, and the incorporation of
the above-mentioned notes in the financing package put in place
to partially finance the transaction. Until the time of closing
the proceeds from the senior secured and senior unsecured notes issuance
will be held in escrow. Moody's understands that the remainder
of the acquisition price, approximately GBP334 million, will
be injected as common equity. Crown NewCo does not have any other
business activities other than those carried out by Priory.
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 B1 corporate family rating (CFR) reflects Moody's expectation
that, following the closing of the transaction, the company
will exhibit high leverage, such that its adjusted debt/EBITDA ratio
will be approximately 6.3x (based on expected 2010 EBITDA).
"While the relatively weak initial credit metrics are a constraining
factor on Crown NewCo's rating, Moody's also notes the
company's strong business profile, with market-leading
positions and stable and recurring revenue and cash generation with regard
to the non-discretionary services provided," says Sabine
Renner, Assistant Vice President and Moody's lead analyst
for Crown NewCo. "This, together with strong profitability
levels and solid segmental and domestic geographical diversification,
mitigate the company's high leverage," adds Ms Renner.
Despite its relatively small size, with approximately GBP290 million
in revenues, Crown NewCo is a leading provider of high-acuity
mental health care, specialist care and education services in the
United Kingdom. While increased funding constraints on the public
healthcare system are likely to have a negative impact on the UK healthcare
industry in general, Moody's expects Crown NewCo's focus
on high-acuity services to not only support a certain revenue resilience,
but also offer additional growth potential due to favourable demographics
and further outsourcing potential from the NHS.
With a 2010 expected adjusted EBITDA margin of around 32% the company
shows strong profitability levels, which historically were supported
by (i) effective cost management; (ii) increasing utilisation of
facilities, with a high average length of stay; and (iii) relatively
high portion spot contracts, which typically allow for higher fees.
Leverage as measured by Debt to EBITDA is expected to be at around 6.3x
after closing, which is high for the B1 rating category.
However, Moody's anticipates this ratio improving relatively
quickly, as it expects the expansion of Crown NewCo's existing
core businesses (healthcare and education) and the development of its
elderly care division to fuel growth in its absolute profit and cash flow.
While Moody's understands that Crown NewCo's elderly care
business will focus on the specialised field of dementia care, where
unmet care needs are likely to support growth, this strategy involves
a certain level of execution as well as margin dilution risk, in
the rating agency's view.
Moody's views Crown NewCo's liquidity position as solid,
given that (i) the company will have an estimated GBP32 million of cash
after the closing of the transaction (of which Moody's understands
approximately GBP20 million may be used for already identified acquisitions);
and (ii) the rating agency expects the company to continue to achieve
positive free cash flow generation. In addition, Moody's
expects that Crown NewCo's GBP70 million revolving credit facility
-- which will be the company's first scheduled debt maturity,
in 2017 -- will be undrawn at closing. The facility is subject
to a material adverse change clause and a financial covenant, which
is likely to have satisfactory headroom, in the rating agency's
view. Moody's also expects Crown NewCo's cash balance
and cash flows to be sufficient to cover its cash outflows relating to,
for example, working capital or capital expenditures.
The GBP70 million senior secured revolving credit facility and the GBP425
million worth of senior secured notes benefit from pari-passu ranking
guarantees from all material group entities, representing a minimum
of 85% of all the group assets and EBITDA. While both instruments
benefit from a pledge of essentially all group assets, the (P)Ba1
rating assigned to the revolver (Loss Given Default rating of LGD1,
1%) is a reflection of the instrument's super seniority in
the event of an enforcement of the collateral, with only the remaining
proceeds to be applied to the senior secured notes ((P)Ba3, LGD
3, 40%). The (P)B3 (LGD5, 88%) rating
on the GBP175 million worth of senior unsecured notes reflects their junior
ranking behind a sizable portion of Crown NewCo's secured debt and
the subordinated nature of the guarantees in place.
Moody's notes that the proceeds of the notes issuance will be placed
in an escrow account (unguaranteed but with the proceeds being pledged
as security) and will only be released upon closing of the acquisition.
If the acquisition does not materialize, Crown NewCo will be required
to redeem the notes at a redemption price of 100% of the initial
issue price plus accrued and unpaid interest.
Assignments:
..Issuer: Crown NewCo 3
.... Probability of Default Rating,
Assigned B1
.... Corporate Family Rating, Assigned
B1
....Senior Secured Bank Credit Facility,
Assigned (P)Ba1
....Senior Secured Bank Credit Facility,
Assigned a range of LGD1, 01 %
....Senior Secured Regular Bond/Debenture,
Assigned (P)Ba3
....Senior Secured Regular Bond/Debenture,
Assigned a range of LGD3, 40 %
....Senior Unsecured Regular Bond/Debenture,
Assigned (P)B3
....Senior Unsecured Regular Bond/Debenture,
Assigned a range of LGD5, 88 %
Moody's notes that Crown NewCo is weakly positioned in the B1 rating
category. The stable outlook on the rating reflects Moody's
expectation that, going forward, Crown NewCo will improve
its credit metrics relatively quickly towards the requirements for the
B1 rating category, as exemplified by an adjusted debt/EBITDA ratio
trending close to 5.0x by 2012. The stable outlook is also
based both on Moody's expectation that (i) Crown NewCo will preserve
a sufficient liquidity cushion (supported by positive free cash flow generation);
and (ii) the company will not make any transforming acquisitions or shareholder
distributions.
Negative pressure could be exerted on the rating in the event of increasing
margin pressure resulting from changes in the UK regulatory healthcare
framework or competitors offering aggressive rates, or if Crown
NewCo were to fail to improve its credit metrics over the next few quarters
to a level of adjusted debt/EBITDA well below 6.0x.
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,
with for example adjusted debt/EBITDA improving to below 4.5x.
An upgrade would also require Crown NewCo to achieve at least break-even
profitability levels in its elderly care business.
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 LTM revenues as per September 2010 amounted to
approximately GBP290 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.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
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used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
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
Paris
Eric de Bodard
MD - Corporate Finance
Corporate Finance Group
Moody's France SAS
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Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
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Moody's assigns B1 CFR and (P)Ba3 and (P)B3 bond ratings to Crown NewCo 3 (Priory), outlook stable
