Four Seasons Healthcare PIK holders vote to enforce as time runs out for consensual plan

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A group of Four Seasons Healthcare PIK note holders have indicated they may enforce on the nursing home operator’s GBP 1.4bn securitisation, two sources close to the situation told Debtwire. After voting in favour of enforcement, the junior creditors could be set to trigger the first UK CMBS restructuring, putting complicated securitisation structures and documentation to the test. If a consensual agreement cannot be reached by 6 July, the UK-based nursing home suggested the business will be put up for sale with Deutsche Bank advising.

Four Seasons has been locked in negotiations with various creditor groups for almost a year. In an attempt to force a resolution, special servicer Hatfield Philips recently presented a revised term sheet to creditors. The latest proposal called for a debt-for-equity swap for all but the topmost A1 and A2 tranches (totalling GBP 600m) of the securitisation. At a meeting scheduled on 6 July, 100% approval is required from the seniors and 75% from senior PIK holders.

Hatfield Philips did not respond to requests for comment.

Under the revised plan, Hatfield Philips was generous in its allocation of equity to the lower tranches, said the sources. Surprisingly, the IG tranches where the value is expected to break, do not secure a majority equity stake, two of the sources noted. Despite being heavily underwater, junior creditors are offered more than a token equity stake to ensure smooth passage.

“[According to the special servicer] if you don’t agree to the plan, this will be put up for sale or go into administration,” said a source familiar. “The PIKs have a lot of power. If they are going to go down the enforcement route they must do it now; they know they have the ability to cause major disruption.”

Four Seasons’ performance has been strong from an operational standpoint, with EBITDA growing steadily from a GBP 100m base, say the sources. The main sticking point is the logistics behind refinancing the nursing home operator’s GBP 1.25bn bridge loan, given the lack of access to financing via the CMBS market and excess leverage on the original deal.

There is stability on earnings, but this business is still only worth a sum in the region of GBP 700m, said a second source familiar. “Everybody has to vote on the proposal, however some classes of the PIK have already voted to enforce,” he claimed. The PIKs are subject to a 90-day standstill increasing to 120 days if the seniors decide to enforce.

Holders of the PIK notes have written to the company requesting a larger equity stake. No enforcement notice has been issued, and no response was issued to their request, said two of the sources.

Valuations undertaken last year for the UK-based nursing home operator came in around GBP 1.1bn - the dividing point where the IG tranches finish and the B tranches begin. A number of sources at the time were skeptical, claiming the valuation was based on unrealistic expectations an OpCo/PropCo financing could be completed in the current environment. Using traditional OpCo metrics, a valuation should be nearer GBP 600m-GBP 800m, they noted.

Holders of the IG tranches sit in the middle, said the sources. “If this business is put up for sale they will get zero, despite many of the holders still being marked at par,” said the first source. Under the inter-creditor deed, the IG tranches are pretty powerless, speculated the second.

If a sale does take place, only the IG1s may feel safe, commented a third source familiar. “The special servicer has drawn a line in the sand, a sale might crystalise value.”

Financed by the Qatar Government and Sheikh Hamad bin Jasim bin Jaber al-Thani, Three Delta acquired Four Seasons Healthcare from Allianz Capital Partners for GBP 1.4bn in September 2006, representing a 14x sale multiple. The Qatari’s equity cheque was financed via junior debt consisting of a GBP 65m senior PIK note majority owned by a UK-based hedge fund, and a GBP 100m junior PIK note majority owned by RBS and Citadel.

Credit Suisse repackaged GBP 600m of the GBP 1.24bn Four Seasons Healthcare term A loan into a securitisation backed by cash flows from the bridge. Sitting underneath the securitisation are the GBP 140m IG1, GBP 200m IG2 and GBP 141.3m IG3 tranches controlled by RBS. In addition, there is a GBP 25m working capital facility structurally senior to the securitisation. Four Seasons’ junior debt comprises a GBP 100m B1 tranche controlled by two large hedge funds (Cheyne and Marathon), a GBP 58.67m B2 tranche and a GBP 38m facility C controlled by MSREF.

The topmost A1 and A2 notes (left in place under Hatfield Philips proposal) are due on September 2010, noted a third source. “This [potentially] means there will be a second round of restructuring in fifteen months time,” he speculated.

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