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Senior lenders to UK-based care home operator Four Seasons Healthcare interviewed legal and financial advisors this week in anticipation of a debt restructuring, two sources close to the situation told Debtwire. RBS, which controls the majority of the senior subordinated debt tranches in the nursing home operator’s complex capital structure, is likely control the fulcrum of the anticipated workout, said a third and fourth source close to the situation.
Three Delta, a GBP 20bn-plus investment fund controlled by the Qatar government and Sheikh Hamad bin Jasim bin Jaber al-Thani, acquired Four Seasons Healthcare from Allianz Capital Partners just 22 months ago. Allianz sold the company for GBP 1.4bn at 14x EBITDA multiple and GBP 1.2bn (86%) of that sum was financed with bridge loans arranged by Credit Suisse that mature 1 September.
At the time of the transaction, its relatively high leverage was justified by the estimated GBP 1.493bn value of Four Seasons’ property portfolio. But as the UK real estate market plummeted, and credit markets seized up, the sponsors struggled to refinance the debt even as the value of the underlying collateral dwindled.
The bridge loan comprises nine distinct tranches and is secured on 303 properties held by 15 PropCos. Advisory roles for the company, senior creditors and Hatfield Phillips - the company’s loan servicer - are now up for grabs, according to sources close to the situation. Lazard and Close Brothers participated in a pitch for senior creditors Thursday (3 July) and an appointment will be made within days, they said.
Contrary to recent press reports, the UK nursing home operator is not currently in breach of any bank covenants. However, Hatfield Philips – the servicer of Four Seasons’ GBP 600m securitisation - notified lenders in May that the made a cure payment of GBP 3.328m that month to rectify a covenant breach. At the end of March, interest coverage was 1.04x versus 1.08x ratio required by the credit agreement
Credit Suisse repackaged GBP 600m of the bridge facility’s GBP 1.24bn senior term loan A into Titan Europe 2006-4, a securitisation backed by cash flows from the bridge loan which expires on 1 September 2008. The securitisation is split into a GBP 425m A1 tranche paying Libor+ 28bps and a GBP 175m A2 tranche paying Libor+ 35bps.
In addition to the securitisation, a GBP 25m working capital facility is structurally senior to the securitised ‘Four Seasons Loan’. Sitting underneath the securitisation are a number of subordinated tranches stemming from the remainder of the senior term loan A. These include a GBP 140m IG1, GBP 200m IG2, GBP 141.3m IG3 that are principally held by RBS as well as a GBP 100m B1 tranche, GBP 58.67m B2 tranche and a GBP 38m facility C (amounts drawn at the time of the securitisation) distributed among a number of hedge funds.
The bottom piece of the capital structure comprises a GBP 60m senior PIK vendor loan note from Allianz and a GBP 165m junior PIK note led by RBS paying 23%.
Due to excess leverage and reduced operating profits, a proportion of the subordinated term loans - in particular the PIK notes - are unlikely to be repaid in full when the loans expire in September, noted three of the sources. However, the securitisation is highly unlikely to be impaired, noted two of the sources. PIK holders are advised by Kirkland and Ellis and Houlihan Lokey, said the sources.
The Qataris’ have not presented any restructuring proposals so far, said all the sources. “The deadline everyone is working towards is the repayment of the bridge on 1 September,” the second source noted, adding that there isn’t much time.
Even before any proposal is presented, RBS, as the recent owner of the majority of the subordinated A facilities, is likely to hold the key to the restructuring, according to two of the sources.
Under the Four Seasons loan documentation, a ‘controlling class’ - the most junior debt impacted under the payments waterfall [subject to a number of tests] - can buy out the tranches above it if a ‘purchase event of default’ has occurred. Such defined events include payment defaults, enforcement proceedings and acceleration.
The UK investment bank also holds a minority stake in the securitised loan, while Credit Suisse owns the majority of the securitisation, noted the sources. RBS is advised by Rothschild, according to the same sources. RBS did not respond to requests for comment.
The servicer, Hatfield Philips is also expected to have a key role in any workout, noted the sources. The servicer becomes a special servicer under certain circumstances. These include payment defaults, notice of an enforcement event, and notification by the borrower of an inability to pay debts coming due. The servicer is being advised by Allen and Overy, according to two of the sources close.
According to two of the sources, the Qataris’ recently took full control of Three Delta’s interest in Four Seasons. “Credit Suisse and their advisors Ernst & Young are now working for the Qataris, it is an indication that they are looking to cut a deal with the senior creditors,” said one source close to the situation. Latham & Watkins are acting as their legal advisors, said two of the sources. Latham & Watkins did not respond to requests for comment.
“The Qataris’ can cure the situation by writing a big cheque, however it is hard to imagine this happening,” said the first source close. “The key question is where does the value break in the structure, and how do you roll over the debt,” he added.
“In theory, the controlling class has a lot of power,” said the second source close to the situation. “However it is unclear what they can do in practice,” he added.
“I’m not expecting the controlling class to take out other creditors,” said the first source, “I’m expecting a more holistic approach,” the source added.
Four Seasons Healthcare, Hatfield Philips, Allen and Overy, and Houlihan Lokey did not respond to requests for comment.
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