DBRS Places Centric Health Under Review with Negative Implications

DBRS has today placed the ratings of Centric Health Corporation (Centric or the Company) Under Review with Negative Implications following the Company’s announcement that it has entered into a definitive agreement to sell 100% of the common shares of its Home Care business, Community Advantage Rehabilitation, Inc. (CAR), and that it is currently pursuing the sale of its Senior Wellness operations.

On November 29, 2013, DBRS confirmed the Issuer Rating and Senior Secured 2nd Lien Notes rating of Centric at B (high) and changed the trends to Negative from Stable. The rating action reflected DBRS’s concern that weaker-than-expected operating performance through Q3 2013 could result in the Company’s credit risk profile weakening beyond a level considered consistent with the B (high) rating category. DBRS also noted that performance would be further challenged by Government of Ontario changes to the Ontario Health Insurance Plan funding model for publicly-funded physiotherapy in long-term care and retirement homes.

The Company announced today that, in light of recent determinations by the Ministry of Health and Long-Term Care (MOHLTC) surrounding a perceived conflict of interest between the Company’s Home Care and Senior Wellness businesses and its retail and home medical equipment operations, the Company has made a decision to sell the non-retail Home Care and Senior Wellness businesses, both of which are largely funded by the MOHLTC.

At the same time, Centric announced that it has entered into a definitive agreement to sell 100% of the common shares of CAR to an arm’s length third-party purchaser for proceeds of $2.5 million, subject to certain adjustments. The purchase price will be satisfied by the issuance of an eight-year note that is expected to bear interest at 12% per annum, payable monthly.

The Under Review with Negative Implications status reflects the possible decline in earnings associated with the sale of CAR and the Senior Wellness operations while recognizing the cash flows derived from the structure of the sale. The action also reflects the at least temporary downward impact on the adjusted EBITDA of retail and home medical as a result of lower referrals, and the expected decline in the proportion of revenues that are paid by the government.

In its review, DBRS will focus on (1) the impact from the sale of CAR and the potential sale of the Senior Wellness operations on the Company’s business risk profile, including any negative effect on its bundling and growth initiatives; (2) the final value, form and use of proceeds of any transaction for the sale of CAR and the Senior Wellness operations and its impact on the Company’s financial risk profile; and (3) the Company’s longer-term business strategy and financial management intentions.

DBRS will proceed with its review as more information becomes available and aims to resolve the Under Review status as soon as possible.

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 methodologies are Rating Companies in the Services Industry, Rating Companies in the Merchandising Industry and DBRS Recovery Ratings for Non-Investment Grade Corporate Issuers, which can be found on our website under Methodologies.