Learning Care Group (US) No. 2 Inc. Downgraded To 'B-' On Proposed Debt-Funded Dividend; Outlook Stable; New Debt Rated
- U.S.-based early childhood education provider Learning Care Group (US) No. 2 Inc. plans to issue a $755 million senior secured debt facility, comprising a $75 million first-lien revolving credit facility, a $520 million first-lien term loan, and a $160 million second-lien term loan.
- The company will use the proceeds, along with proceeds from a $300 million preferred equity investment, to pay a $636 million dividend to its financial sponsor, American Securities LLC, refinance existing debt, and pay related transaction fees.
- We expect Learning Care's credit metrics will weaken as a result of the transaction, with adjusted leverage rising above 7x and reported FOCF declining to debt less than 2%.
- We are lowering our corporate credit rating on Learning Care to 'B-' from 'B+'. We are also assigning our 'B-' issue-level and '3' recovery ratings to the company's proposed first-lien credit facility and term loan, and our 'CCC' issue-level and '6' recovery ratings to the proposed second-lien term loan.
- The stable rating outlook reflects our expectation that the company's leverage will decline to the mid-6x area over the next 12 months, it will generate mid- to high-single-digit revenue and EBITDA growth, and its FOCF will be modest as it reinvests to fund growth.
NEW YORK (S&P Global Ratings) Feb. 26, 2018--S&P Global Ratings today lowered its corporate credit rating on U.S.-based early childhood education provider Learning Care Group (US) No. 2 Inc. to 'B-' from 'B+'. The rating outlook is stable. At the same time, we assigned our 'B-' issue-level rating on the company's proposed $75 million senior secured first-lien revolving credit facility due 2023 and $520 million senior secured first-lien term loan due 2025. The '3' recovery rating indicates our expectation for meaningful recovery (50%-70%; rounded estimate: 60%) of principal for lenders in the event of a payment default. We also assigned our 'CCC' issue-level rating and '6' recovery rating to the company's proposed $160 million senior secured second-lien term loan due 2026. The '6' recovery rating indicates our expectation for negligible recovery (0%-10%; rounded estimate: 0%) of principal for lenders in the event of a payment default. We will withdraw our existing issue-level and recovery ratings on the company's debt once the transaction closes. The downgrade reflects our estimate that Learning Care's large $636 million debt-financed dividend will cause pro forma lease-adjusted debt leverage (which includes our $300 million preferred perpetual equity debt adjustment) to jump above 7x at the transaction's closing from 4x as of Dec. 30, 2017, and reported free operating cash flow (FOCF) to debt to fall to less than 2%. We also expect that the company will use excess cash flow to invest in growth initiatives, rather than debt repayment, causing leverage to remain elevated in the high-6x area over next 12 months. The increased interest burden will likely strain the company's cash flow over the next two years and increase its vulnerability to cyclical economic swings. The stable outlook reflects our expectation that the company's leverage will decline to the mid-6x area over the next 12 months, it will generate mid- to high-single-digit revenue and EBITDA growth, and its FOCF will be modest as it reinvests to fund growth. We could lower our corporate credit rating on Learning Care if the company's operating performance weakens, resulting in FOCF approaching breakeven levels. This could occur if employment trends unexpected reverse, resulting in lower enrollment and insufficient cash flow to fund the company's capital spending requirements and debt service. Although unlikely over the next 12 months, we could consider an upgrade if we project sustained reported FOCF of around $50 million and expect debt balances to decline. This could occur if the company's operating performance continues to improve due to successful new center opening and increased center utilization.
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | Kathryn Archibald, New York 2124382625; kathryn.archibald@spglobal.com |
| Secondary Contact: | Scott E Zari, CFA, Chicago 312-233-7079; scott.zari@spglobal.com |
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