New York, April 06, 2020 -- Moody's Investors Service, ("Moody's") downgraded
KUEHG Corp.'s ("KinderCare") Corporate Family Rating ("CFR")
to Caa1 from B3, Probability of Default Rating ("PDR") to Caa1-PD
from B3-PD, the first lien credit facilities' instrument
ratings to B3 from B2, and second lien term loan rating to Caa3
from Caa2. The outlook is negative.
The downgrade reflects Moody's expectations for a significant revenue
and earnings decline in 2020 due to coronavirus related center closures
as well as Moody's projection for a recession in the U.S
in 2020, which could have a prolonged impact on earnings given the
company's business is highly dependent on the health of economy
and labor market employment. Moody's expects lease adjusted
debt-to-EBITDA to rise from 6.2x at year end 2019
to well over 7.0x in 2020. KinderCare has closed the majority
of its centers as of mid-March, and Moody's expects
efforts to contain the coronavirus will restrict KinderCare's ability
to reopen for an unknown period. KinderCare typically charges on
a weekly or monthly basis, and Moody's believes a return to
pre-pandemic enrollment levels will be gradual once centers reopen
because lower employment will reduce center-based child care demand
and some individuals may be reluctant to put their children in social
settings.
Downgrades:
..Issuer: KUEHG Corp.
.... Corporate Family Rating, Downgraded
to Caa1 from B3
.... Probability of Default Rating,
Downgraded to Caa1-PD from B3-PD
.... Senior Secured First Lien Bank Credit
Facility, Downgraded to B3 (LGD3) from B2 (LGD3)
.... Senior Secured Second Lien Term Loan,
downgraded to Caa3 (LGD5) from Caa2 (LGD5)
Outlook Actions:
..Issuer: KUEHG Corp.
....Outlook, Revised to Negative from
Stable
RATINGS RATIONALE
KinderCare's Caa1 CFR reflects high leverage with Moody's adjusted
debt-to-EBITDA rising to well above 7.0x in 2020
due to expected earnings declines as well as a high cash burn during center
closures which could cause stress on liquidity should closures or lower
enrollment volumes persist. The rating is also constrained by the
cyclical, highly fragmented and competitive nature of the child-care
and early childhood education industry as well as the susceptibility to
reductions in federal and state funding support. The rating also
considers its event and financial policy risk due to private equity ownership.
However, the rating is supported by the company's large scale
within the childcare and early childhood education industry, broad
geographic diversity within the U.S., and well-recognized
brands. The rating also incorporates the favorable long term demographics,
including population growth, increasing percentage of dual income
families as well as increased focus on early childhood education.
The rapid and widening spread of the coronavirus outbreak, deteriorating
global economic outlook, falling oil prices, and asset price
declines are creating a severe and extensive credit shock across many
sectors, regions and markets. The combined credit effects
of these developments are unprecedented. The childcare sector has
been one of the sectors most significantly affected by the shock.
More specifically, the weaknesses in KinderCare's credit profile,
including its exposure to US quarantines have left it vulnerable to shifts
in market sentiment in these unprecedented operating conditions and KinderCare
remains vulnerable to the outbreak continuing to spread. Moody's
regards the coronavirus outbreak as a social risk under our ESG framework,
given the substantial implications for public health and safety.
Today's action reflects the impact on KinderCare of the breadth
and severity of the shock, and the broad deterioration in credit
quality it has triggered.
The negative outlook reflects Moody's view that KinderCare remains
vulnerable to coronavirus disruptions, rapidly deteriorating economic
environment in the US, as well as the uncertainty regarding the
timing of center re-openings. The negative outlook also
reflects Moody's view that liquidity stress will increase should
there be prolonged center closures or lower volumes.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if the centers reopen on a timely basis,
enrollment recovers such that the company resumes revenue and earnings
growth with Moody's adjusted debt-to-EBITDA leverage
maintained below 6.5x with good liquidity including positive free
cash flow generation.
The ratings could be downgraded if center closures persist or enrollment
recovery is slow upon center reopening such that operating performance
and liquidity continue to weaken.
The principal methodology used in these ratings was Business and Consumer
Service Industry published in October 2016 and available at https://www.moodys.com/research/Business-and-Consumer-Service-Industry--PBC_1037985.
Alternatively, please see the Rating Methodologies page on www.moodys.com
for a copy of this methodology.
Based in Portland, Oregon, KinderCare Education is a large
scale for-profit provider of child-care and education services
in the U.S. As of December 31, 2019, the company
operated about 2,000 early childhood education and care centers
in the United States. The company has been owned by Partners Group
since 2015. Revenue was approximately $1.89 billion
in 2019.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
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announced and described above.
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issued by one of Moody's affiliates outside the EU and is endorsed
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Joanna O'Brien
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
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John E. Puchalla, CFA
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
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