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Global Credit Research - 09 Jul 2010
Approximately GBP250 million debt rated
Frankfurt, July 09, 2010 -- Moody's Investors Service has today assigned a B1 corporate family
rating (CFR) and B1 probability of default (PDR) rating to Care UK Health
& Social Care Newco Limited ("Care UK" or "the company"),
the indirect holding company of Care UK Limited, and the direct
holding company of Care UK Health & Social Care plc. At the
same time, Moody's has assigned a provisional (P)B2 rating
to the proposed GBP250 million senior secured notes due in 2017,
which will be issued by the subsidiary Care UK Health & Social Care
plc. The rating outlook is stable.
The ratings reflect (i) Care UK's solid market position as a leading
provider of various outsourced private healthcare and social care services
in the United Kingdom, (ii) stable and recurring revenue and cash
generation base of the healthcare and social services provided by Care
UK, (iii) strong profitability levels considering EBITDA Margins
in the high teens in percentage terms, and growth potential due
to favourable demographics and further outsourcing potential in the UK
healthcare market, (iv) revenue protection as a significant proportion
of revenues are backed by multi-year contracts, reduced earnings
volatility as most contracts have cost indexation clauses and a minimum
exposure to bad debt expenses given the prevalence of government-related
institutions as primary contractor, (v) solid liquidity cushion,
with headroom under a GBP80 million revolving credit facility, strong
asset-to-debt coverage and an extended debt maturity profile
following the issuance of the notes.
The ratings are constrained by (i) high financial leverage following the
leveraged buyout of Care UK by Bridgepoint, which is expected to
moderately increase in 2011 due to contract maturities, but anticipated
to be gradually improved in 2012 and beyond in line with the requirements
for the B1 rating category, (ii) challenge to renew maturing outsourcing
contracts with competitive tariffs in light of rising budgetary pressures
of government-related contractors, which could weigh in somewhat
on future profitability, (iii) pressure to realise constant efficiency
improvements and generate rising treatment numbers at constant quality
levels to mitigate changing specifications and pressure on tariffs of
new contracts but also to recover cost inflation for existing non-inflation
indexed contracts, (iv) high capital intensity and funding needs
of the healthcare business, as upcoming outsourcing opportunities
from governments require advance investments which could constrain free
cash flow generation.
The stable outlook anticipates that the company will broadly operate within
the credit metrics and profitability requirements for the B1 rating category
going forward. We expect that Care UK will realise a sufficient
contract renewal rate to support its current revenue base and overhead
cost structure. The stable outlook is based both on the expectation
that the company preserves a sufficient liquidity cushion (supported by
positive free cash flow generation), including protection of a sufficient
headroom under financial covenants of the revolving credit facility and
on the absence of transforming acquisitions and shareholder distributions.
An upgrade would require a sustained period of improved profitability
and cash flow generation allowing the company to operate within leverage
parameters commensurate with a higher rating, as measured by Debt
to EBITDA remaining below 5x, EBITA to Interest Coverage improving
above 2.0x, and RCF to Net debt moving towards 15%
while preserving solid profitability levels.
Negative pressure would be exerted on the rating if credit metrics erode,
such as Debt to EBITDA above 5.5x, EBITA to Interest Coverage
below 1.3x, RCF to net Debt falling below 10%,
or as a result of rising margin pressure from changes in the UK regulatory
The (P)B2 rating (LGD 4, 61%) assigned to the senior secured
notes is one notch below the B1 CFR. The rating of the notes reflects
its junior ranking behind the sizeable GBP80 million super senior revolving
credit facility which ranks ahead. The revolving credit facility
which will also be issued at the level of Care UK Health & Social
Care plc, is guaranteed on a senior secured basis by a majority
of operating companies, benefits from a downstream guarantee provided
by Care UK Health & Social Care Newco Limited, and is secured
by a first-lien pledge on a majority of the company's assets.
The senior secured notes are secured by the same asset base on a second-lien
basis as reflected in the notching, and benefit from the same guarantees
on a junior basis.
This provisional (P)B2 rating is based on draft documentation received
so far and subject to our satisfactory review of final documentation.
Care UK's ratings were assigned by evaluating factors we consider
relevant to the credit profile of the issuer, such as (i) the business
risk and competitive position of the company versus others within its
industry, (ii) the capital structure and financial risk of the company,
(iii) the projected performance of the company over the near-to-intermediate
term, and (iv) management's track record of tolerance for
risk. These attributes were compared against other issuers both
within and outside of Care UK's core industry, and we believe
that Care UK's ratings are comparable to those other issuers of
similar credit risk.
..Issuer: Care UK Health & Social Care plc
....Senior Secured Regular Bond/Debenture,
Assigned (P)B2, LGD Assessment LGD 4, 61%
..Issuer: Care UK Health & Social Care Newco Limited
....Corporate Family Rating, Assigned
....Probability of Default Rating; Assigned
Care UK, headquartered in London (United Kingdom), is the
largest independent provider of various outsourced health care services
to the National Health Service (NHS), the publicly-funded
healthcare system in the UK. Care UK is also a leading provider
of social care services, providing residential care, community
care and specialist care. In 2009, Care UK generated revenues
of GBP410 million.
Christian Hendker, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Eric de Bodard
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
Moody's assigns a B1 rating to Care UK, (P)B2 rating to senior secured notes
No Related Data.
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