DBRS Morningstar Assigns Leisureworld Senior Care LP Issuer Rating of A (low) with a Stable Trend, Confirms Rating on Series B Senior Secured Debentures

DBRS Limited (DBRS Morningstar) assigned an Issuer Rating of A (low) with a Stable trend to Leisureworld Senior Care LP (Leisureworld). DBRS Morningstar also confirmed the rating of the Series B Senior Secured Debentures (the Debentures) at A (low) with a Stable trend. The Issuer Rating is based on DBRS Morningstar's updated “Rating Companies in the Canadian Long-Term Care Industry” methodology released on September 9, 2020 (see related press release “DBRS Morningstar Assigns Issuer Ratings to Long-Term Care Operators,” published September 14, 2020). The rating confirmation is based on Leisureworld's position as a leading provider of long-term care (LTC) in Ontario, high-quality portfolio of LTC properties, stable and predictable funding, and strong track record of adhering to strict regulatory requirements. Although the Coronavirus Disease (COVID-19) pandemic has materially affected Leisureworld's operations, the impact on key financial risk assessment metrics (FRAs) is likely to be temporary and supports the Stable trends.

Prior to the pandemic, Leisureworld's operating performance was strong and its FRAs were improving, consistent DBRS Morningstar’s expectations when confirming the rating on the Debentures in October 2019. However, the coronavirus pandemic has led to elevated mortality of LTC residents and significantly disrupted operations. This has led to increased regulatory and public scrutiny, potential for lasting reputational damage, and uncertainty about the longer-term impacts on Leisureworld's business and FRA factors. Notwithstanding these challenges, there is governmental support to operators, such as incremental funding for coronavirus expenses and a revamped capital funding formula in Ontario.

While there has been a notable decline in EBITDA, we expect extraordinary pandemic expenses to gradually subside and to be partially recovered through government grants. As such, we believe that Leisureworld's Q2 2020 results likely reflect the depth of the deterioration in its financial metrics because of the pandemic, and we anticipate a gradual recovery in the coming quarters as strong demand and stable government funding continue to support revenue and extraordinary pandemic expenses subside. For 2020, DBRS Morningstar expects a debt-to-EBITDA ratio of approximately 5.7 times (x). Meanwhile, the EBITDA-to-interest ratio is estimated to be 6.3x in 2020. All ratios are DBRS Morningstar-adjusted.

RATING DRIVERS
Although not anticipated, DBRS Morningstar may consider a negative rating action if the pro forma financial risk metrics deteriorate on a sustained basis, with a debt-to-EBITDA ratio above 7.5x and EBITDA interest coverage below 3.0x. A positive rating action is unlikely in the near term given the challenging operating environment and deterioration in financial metrics.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Canadian Long-Term Care Industry (September 9, 2020) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

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 under Related Documents or by contacting us at [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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