DBRS Assigns Provisional Rating of A (low) to Series B Debentures of Leisureworld Senior Care

DBRS has today assigned a provisional rating of A (low), with a Stable trend, to the proposed new $[317] million Series B Senior Secured Debentures issue of Leisureworld Senior Care LP (Leisureworld or the Company). Proceeds from the proposed seven-year notes will be used for the early redemption of the existing 4.814% Series A Senior Secured Debentures in full, as well as to pay for early redemption and issuance costs associated with the refinancing.

The early refinancing was anticipated by DBRS at the time of the last rating report, dated August 28, 2013. DBRS then stated its expectation that a meaningful component of amortization would be expected for any new issue, considering the finite useful lives of the facilities and the limited duration of the capital cost funding received from the Province of Ontario. To address this requirement, a principal reserve account segregated from all other accounts and controlled by the trustee has been introduced into the financing structure. The account is required to be funded whenever distributions are made, and at least semi-annually to a predetermined minimum balance, such that at the maturity date of the debentures, the account will have a minimum balance of $45 million to be used for redeeming a portion of the outstanding principal.

Although deemed prudent and essential by DBRS, the required contributions to the principal reserve account increases Leisureworld’s overall debt service obligations, causing a reduction in the pro forma adjusted debt service coverage ratio (DSCR) toward the minimum threshold of 2.5 times deemed appropriate for the current “A” rating assigned to the 4.814% Series A Senior Secured Debentures, and reversing the trend of rising adjusted DSCR levels achieved in recent years. As a result, the provisional rating assigned to the proposed Series B Senior Secured Debentures is one notch lower, as anticipated in the last rating report. The lower rating is also justified by the continued exposure of the Company to refinancing risk through the proposed seven-year term of the bond and the shrinking proportion of unconditional capital cost funding from the Province going forward.

Continued principal reserving at the proposed rate past the maturity date of the new issue would result in the full amortization of debt over a period of approximately 30 years. Management believes that an ongoing and dedicated program of preventative maintenance and timely capital expenditures will allow all of the existing assets to be available for use for long-term care operations beyond the approximately 30-year implied amortization period from January 2014. DBRS has reviewed Leisureworld’s capital budget for the upcoming years and is comfortable with the assumptions made.

Q3 2013 results demonstrate sustained strength in Leisureworld’s operating performance, with revenue growth of 3.5% outpacing expenditure growth of 2.0% owing primarily to rising private pay per diem rates implemented for semi-private and private rooms. DBRS expects year -end fiscal 2013 EBITDA to exceed 2012 levels, maintaining a growth trend for the third consecutive year.

Leisureworld Senior Care Corporation (ParentCo) continues to pursue its acquisition strategy of retirement homes, a sector considered to have weaker credit fundamentals as compared to Leisureworld’s core business line of regulated long-term care (LTC) facilities. In December 2013, ParentCo finalized its acquisition of a portfolio of ten LTC facilities and retirement homes from Specialty Care Inc., as well as the third party seniors living management business previously operated by Specialty Care Inc., announced in April 2013. However, the new homes are held separately from Leisureworld, in ParentCo, and the Company exhibits features of bankruptcy remoteness from ParentCo, including separate bank accounts, the absence of upstream guarantees and independent operations. DBRS has obtained a legal opinion stating that the assets and liabilities of ParentCo would not be substantively consolidated with those of Leisureworld in an insolvency proceeding of ParentCo or its other subsidiaries, providing comfort that acquisitions undertaken by ParentCo do not dilute Leisureworld’s risk profile.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodology is Base General Methodology for Corporate Companies (Appendix 1), which can be found on our website under Methodologies.