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23 Apr 2007
Moody's assigns a (P)B2 CFR to Castle Holdco 4, Ltd. (holding for Countrywide plc); outlook stable
Approximately GBP 740mn of debt instruments affected
London, 23 April 2007 -- Moody's today assigned a (P) B2 corporate family rating to Castle
Holdco 4, Ltd, the holding company for Countrywide plc ('the
company'). The outlook is stable. On 13 April 2006
the company's shareholders approved the acquisition of the company
by Apollo Management L.P. At the same time, Moody's
also assigned a (P) Ba2 rating to the company's RCF, a (P)B2 to
the proposed Senior Secured Notes and a (P) Caa1 to its Senior Notes.
The (P) B2 corporate family rating reflects: i) the company's
market share and diversification, with its broad array of services
which enhance the ability to cross-sell its products; ii)
its broad geographic reach within the UK, although the company remains
focused on the UK market; iii) its flexible cost base, notably
staff costs, which are by far the highest proportion of operating
costs; and finally iv) the continued growth in demand for houses
and longer-term trend in house prices over the past two decades.
The main constraints to the ratings include: i) high leverage,
which is expected to amount to approximately 6x on a pro forma basis upon
completion of the transaction; ii) cyclicality of the UK housing
market, and the high levels of UK house prices as a multiple of
average earnings currently; iii) the impact of interest rate movements
on market confidence, as was recently seen in the company's
2005 profits; iv) the uncertainty surrounding the potential impact
on speculative house selling by the introduction of Home Information Packs
(HIPs) as of 1 June 2007.
The issuer of the notes and borrower of the Revolving Credit facility
is Castle Holdco 4 Ltd., the direct holding company for Countrywide
and its subsidiaries. Upon completion of the acquisition,
the capital structure is expected to consist of a GBP 305.2mn equity
contribution, as well as GBP 470mn Senior Secured Notes (including
GBP 100mn PIK-toggle notes); GBP 170mn Senior Notes;
and a GBP 100mn Revolving Credit Facility. According to Moody's
LGD methodology, and based on a Probability of Default Rating (PDR)
of (P) B2, the RCF is assigned a (P) Ba2 rating (LGD1, 6%);
the Senior Secured Notes are rated (P) B2 (LGD 4, 51%);
and the Senior Notes are rated (P) Caa1 (LGD 6, 91%).
The company's debt structure will be entirely long-dated,
with the RCF maturing in 2013, the Senior Secured Notes in 2014
and the Senior Notes in 2015, hence over the medium term financial
expenses will consist mainly of interest expenses. Upon completion
of the acquisition, the company's liquidity is expected to
consist of GBP 58mn in cash on hand, as well as the GBP 100mn RCF,
of which GBP 27mn is expected to be drawn at close.
The outlook is stable, reflecting Moody's view that the company's
2006 results showed a significant recovery over 2005. The reported
EBITDA margin (before exceptionals) was at 16.5% in 2006
versus 8.1% in 2005, benefiting from stronger house
prices. Moody's will focus on the sustainability of operating
margins, as well as interest coverage and the impact of interest
rate movements. On a pro forma basis for the transaction,
the EBIT/interest coverage ratio is expected to be about 1.5x,
which positions the company in the B2 rating category while allowing some
flexibility for market cyclicality. If the adjusted EBIT/interest
coverage ratio were to reach at least 1.8x on a sustainable basis,
supported by stability in operating margins similar to those achieved
in 2006, this could be favourable for the rating or outlook.
A marked industry downturn resulting in the EBIT/interest ratio falling
below 1.3x on a continued basis could be negative for the ratings
or outlook.
Countrywide plc is the leading residential property service provider in
the UK, with services that span the entire process of house buying
and selling. These include estate agency services; surveying;
financial services; commercial and residential lettings and residential
property conveyancing. The company was also the founder of Rightmove,
an internet property website, in which it retains a 21.5%
stake. In fiscal year 2006 the company reported revenues and EBITDA
(before exceptionals) of GBP 654mn and GBP 107.6mn, respectively.
Paris
Myriam Durand
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
London
Richard Morawetz
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454
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