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Rating Action:

Moody's downgrades Elli Investments CFR to Caa1; negative outlook

21 Jan 2015

London, 21 January 2015 -- Moody's Investors Service has today downgraded the Corporate Family Rating (CFR) and Probability of Default Rating (PDR) of Elli Investments Limited ('Four Seasons Health Care', or 'the company') to Caa1 and Caa1-PD from B3 and B3-PD respectively. At the same time, Moody's has downgraded to B1 from Ba3 the rating of the super senior bank Facility and to B3 from B2 the rating of the senior secured notes; both of these instruments are borrowed at Elli Finance (UK) plc. The rating of the unsecured notes borrowed at Elli Investments Limited has been downgraded to Caa3 from Caa2. The outlook is negative.

"The downgrade reflects Moody's expectation that earnings and cash flows in 2015 will remain depressed, and that barring a significant upturn in profitability, Moody's believes that there could be a significant cash burn in the coming 12-18 months", says Richard Morawetz, a Moody's Vice President - Senior Credit Officer and lead analyst for Four Seasons Health Care.

RATINGS RATIONALE

In the first three quarters of 2014, the company reported EBITDA at GBP53.3 million, which compares with GBP73.8 million the prior year. At this time, Moody's does not believe that profits will revive meaningfully in the near future. The general causes of this decline in profits are the increased number of regulatory inspections and embargoes on resident admissions (albeit these are currently lower than the historical peak); the shortage of qualified nurses across the sector, resulting in upward pressure on wages; and reduced funding from local authorities in real terms. The company continued to report a high occupancy rate of 87.2% across the group in the third quarter, reflecting the strong demand for its services generally. With the recent earnings trend, however, and the limited prospects for an improved business outlook, we believe that gross adjusted leverage will remain above 6.75x, which was our guidance for possible downward pressure for the rating.

In spite of the recent resetting of covenants on the bank credit facility, we believe that the company's liquidity will remain weak over the next 12-18 months. In December 2014, the company announced that it had reached an agreement with its banks to revise the covenants for its GBP40 million bank facility to a super senior leverage covenant of 1.2x (ie the ratio of drawn debt under the facility to EBITDA) from a gross leverage ratio previously of 7.5x (measured as total group debt/EBITDA). We view this as a positive development as it significantly alleviates our previous concerns about a potential covenants breach. The revised facility has been converted from a revolving credit facility into a term loan which matures in December 2017; and it retains the same security as previously, such that it remains senior to both the senior secured notes due 2019 and the unsecured notes due 2020. We further believe that the GBP50 million in new equity provided by the shareholders, which was held outside the restricted group at FSHC Group Holdings Limited as of September 2014, will provide an essential source of liquidity in coming quarters. Apart from these two sources of liquidity, the company reported a cash balance of about GBP20 million as of September 2014.

At the same time, however, we believe that the weaker earnings trend and high interest burden, notably the bi-annual interest payments on the bonds of c.GBP26 million, will result in a significant cash burn by the company in coming quarters. The company has completed the operational segmentation process of its homes, whereby it has separated its business into three functional units that focus on dementia care, self-paying clients, and specialist care, and has appointed separate CEOs for each segment. We understand that the deployment of the related capex is still underway. We note that the company has been closing or divesting certain care homes that it deems uneconomic or that do not fit into its new business segmentation, which we believe will offer some support to liquidity. However, in our view, if earnings do not improve in coming quarters, with roughly GBP52 million in bond interest per year, in addition to interest on the bank facility, as well as the underlying run-rate of capex, we believe that the company's cash burn could consume available liquidity over time.

RATIONALE FOR THE NEGATIVE OUTLOOK

The negative outlook reflects mainly our concern that lower profitability and cash generation may exert pressure on the company's overall liquidity in the coming 12-18 months.

WHAT COULD CHANGE THE RATING UP/DOWN

In light of today's action and negative outlook, upward pressure on the rating is unlikely in the medium term, but could be considered if the company's earnings reversed the recent negative trend, resulting in the adjusted leverage metric falling back below 6.75x with EBITA/interest rising to above 1.0x on a sustainable basis, with a stable liquidity profile and no covenants concerns. Given the rating positioning, the rating would likely be downgraded if liquidity concerns were to become more pressing.

The principal methodology used in these ratings was Global Healthcare Service Providers published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Four Seasons Health Care (FSHC) is a leading provider of health and social care services in the UK, with nearly 24,000 beds and about 500 facilities in 2013. In that year, it reported revenues and EBITDA (before exceptional items) of c.GBP710 million and GBP94 million, respectively. Following the acquisition of several homes from the former Southern Cross portfolio in 2011, the company became the largest independent provider of elderly care services in the UK. Elli Investments Ltd. is an intermediate holding company of FSHC Group Holdings Limited; the ultimate owner is Elli Capital Limited, which is owned by private equity firm Terra Firma.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Richard Morawetz
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Elli Investments CFR to Caa1; negative outlook
No Related Data.
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