(The following statement was released by the rating agency)
Nov 08 -
-- On Nov. 5, 2012, U.K.-based health care group Care UK Health & Social Care Investments Ltd. (Care UK) acquired Harmoni, a provider of out-of-hours health care services to the National Health Service in England, for GBP48 million excluding associated transaction costs.
-- We estimate that the transaction will increase Care UK’s Standard & Poor‘s-adjusted leverage to more than 5x in the financial year ending September 2013, which is above the level we consider commensurate with the current rating.
-- We are therefore placing our ‘B+’ long-term corporate credit and issue ratings on Care UK on CreditWatch negative.
-- The CreditWatch placement reflects the possibility of a one-notch downgrade following the acquisition to reflect the increase in Care UK’s leverage.
On Nov. 8, 2012, Standard & Poor’s Ratings Services placed on CreditWatch with negative implications its ‘B+’ long-term corporate credit rating on U.K.-based health care group Care UK Health & Social Care Investments Ltd. (Care UK).
In addition, we placed our ‘B+’ issue rating on the group’s GBP250 million senior secured notes on CreditWatch with negative implications. The recovery rating on the notes is ‘3’, indicating our expectation of meaningful (50%-70%) recovery prospects for noteholders in the event of a default.
The CreditWatch placements follow Care UK’s acquisition of Harmoni, a provider of out-of-hours health care services to the National Health Service (NHS) in England, for GBP48 million, excluding associated transaction costs. We understand that Care UK will fund the acquisition with a combination of cash and debt. Consequently, we calculate that Care UK’s pro forma Standard & Poor‘s-adjusted leverage after the acquisition could increase to more than 5x in the financial year ending Sept. 30, 2013, which is above the level we consider commensurate with the ‘B+’ rating.
We are currently evaluating the impact of the acquisition on the group’s business and financial risk profiles, specifically on the group’s profitability, market position, diversification, and cash flow generation.
The ratings on Care UK continue to reflect our current assessment of the group’s business risk profile as “weak.” This indicates our view of the group’s relatively small size, focus on the U.K. market, and a certain degree of reliance on public funds, which are exposed to the vagaries of the U.K.’s political climate and changes in reimbursement policies. We take a negative view of the risks associated with independent sector treatment centers (ISTCs), including a lack of guaranteed procedure volumes priced at NHS tariffs.
These negative factors are partly offset by Care UK’s good revenue predictability due to a high proportion of forward contracts, especially in its residential care business. This is supported by the group’s position as a leading operator of ISTCs and its entrenched position in the for-profit elderly and specialist care markets. Both of these markets are fragmented and consequently benefit larger operators with economies of scale. The group’s record of winning health care tenders provides further support.
We currently assess Care UK’s liquidity profile as “adequate” under our criteria (see “Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers,” published Sept. 28, 2011, on RatingsDirect on the Global Credit Portal). Our liquidity assessment is based on the following factors:
-- We estimate that Care UK’s liquidity sources (including cash, funds from operations, and an available revolving credit facility ) over the next 12 months will comfortably exceed its uses by more than 1.2x. Even if EBITDA were to decline by 15%-20%, we believe that net sources would remain positive.
-- On June 30, 2012, Care UK had an adjusted balance-sheet cash position of GBP29.3 million. Its only financial debt is in the form of GBP250 million non-amortizing notes that mature in August 2017.
-- In addition, the group has a super senior RCF of GBP80 million, which remains unutilized as of June 6, 2012, apart from about GBP14.7 million in the form of performance bonds relating to certain health care contracts.
-- The RCF documentation contains leverage and interest coverage maintenance covenants. As of June 6, 2012, the group has adequate headroom under these covenants and we estimate that this will remain the case for the next 12 months.
-- Care UK’s business model benefits from low working capital requirements and modest maintenance capital spending (about 2% of revenues).
The ‘B+’ issue ratings on Care UK’s GBP250 million senior secured notes due 2017 are on CreditWatch negative. The recovery rating on the notes is ‘3’, indicating our expectation of meaningful (50%-70%) recovery prospects for noteholders in the event of a default.
We intend to assess the effect of the acquisition on the recovery prospects for the notes once we have more details about the transaction’s financing arrangements. We will then revise, if necessary, the assumptions underpinning our recovery analysis.
For our detailed recovery report, see “Care UK Health & Social Care Investments Ltd. Recovery Rating Profile,” published April 30, 2012.
The CreditWatch placement reflects the possibility of a downgrade following Care UK’s debt-funded acquisition of Harmoni, to reflect our view that the group’s adjusted leverage will rise to more than 5x, which is above the level we consider commensurate with the current rating.
We aim to resolve the CreditWatch this month, subject to further progress on the transaction and following our discussions with management. In these discussions, we aim to determine the effect the transaction will have on the group’s business and financial risk profiles, specifically on the group’s profitability, market position, diversification, and cash flow generation. We will also discuss the group’s financial policy, which we consider to be aggressive, particularly regarding mergers and acquisitions. We consider that a potential downgrade is likely to be limited to one notch.
We will also review the effect of the acquisition financing on the recovery prospects for Care UK’s senior secured notes. The mix of financing that Care UK raises for the acquisition could potentially have a negative bearing on the issue and recovery ratings on the notes.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Care UK Health & Social Care Investments Ltd. Recovery Rating Profile, April 30, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Guidelines For Recovery Ratings On Global Industrial Issuers’ Speculative-Grade Debt, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Care UK Health & Social Care Investments Ltd.
Corporate Credit Rating B+/Watch Neg/-- B+/Stable/--
Care UK Health & Social Care PLC
Senior Secured Debt* B+/Watch Neg B+
Recovery Rating 3 3
*Guaranteed by Care UK Health & Social Care Investments Ltd.