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Four Seasons Health Care agrees £70m creditor lifeline

By Paul Norman - Friday, February 09, 2018 9:23

The Four Seasons Health Care care home chain has secured a £70m loan from its hedge fund lender H/2 Capital Partners, giving it critical breathing space as it seeks to agree a restructuring by end of March.

The agreement will see an increase in Four Seasons' term loan from £40m to £70m, while the interest rate is reduced from Libor plus 6% to Libor plus 3.75%.

"We are very appreciative of H/2’s willingness to consider expanding its already substantial commitment to Four Seasons Health Care and for the continued support of all parties in pursuit of a consensual agreement," said Four Seasons' chairman Robbie Barr, Chairman, Four Seasons Health Care in a statement.

"We believe that this incremental liquidity and initial steps toward a revised governance structure lay the foundation for a consensual restructuring that benefits all stakeholders, and in particular provide continuity of care for our residents."

The parties are working on a full restructuring plan in March, which will see H/2 take control of the chain from Terra Firma, which bought Four Seasons in in 2012 for £825m.

H/2 is understood to be set to appoint Baronness Ford, the Labour peer and well known real estate figurem to lead the group.

The move comes after Four Seasons Health Care agreed a deal in December to defer a £26m debt payment in an attempt to prevent the collapse of the business.

Four Seasons Health Care and its lender, the US investment firm H/2 Capital Partners, issued a statement at the time deferring the debt payment, which was due today, until 2 April 2018. The move postponed key arguments about how to restructure the business.

The deal followed prior warnings from Four Seasons Health Care that it might not honour the payment. The warning prompted fears that the care home operator could fall into administration given the business had only £24.8m in cash on its books and is £540.2m in debt.

In October of 2018, the notes issuers behind the Four Seasons Health Care bond group announced long-anticipated plans for a financial creditor and leasehold estate restructuring via negotiation with its landlords to ensure the long-term stability of Britain’s biggest care home operator.

In May the group, which runs 370 homes, raised its fees for the elderly as it bid to shore up its finances ahead of the crucial restructuring.

The increase, agreed with local authorities, was needed to offset rising food, energy and staffing costs and came in a year when Four Seasons’ debt climbed from £509.9m in April to £565m at the end of December 2016.

Four Seasons confirmed then it would have to refinance later this year to ensure the continued operation of the business.

The company has struggled with the interest payments on its debt after being bought by Guy Hands’ private equity business Terra Firma in 2012 in an £825m highly leveraged deal.

It has annual interest payments of £55.3m on its £565m debt, meaning it is not making the money it needs to pay its bondholders.

The restructuring aimed to deliver an improved capital structure via: the contribution of the 24 homes that sit outside the High Yield Bond Group by Terra Firma via FSHC Group Holdings Limited; the day one impact of Non-High Yield Bond Group contribution results in an EBITDA increase of £18.9m and cash flow increase of £17.1m; and the further upside potential from the leasehold estate restructuring.

In addition senior secured net leverage will be reduced from 7.2x to 5.7x and total net leverage reduced from 10.3x to 6.5x assuming no rent savings are delivered through the leasehold estate restructuring.

The existing £40m super senior term loan facility was refinanced on 16 October 2017 with a new £40m super senior term loan with a maturity date in March 2019. Under this the lenders have agreed to support the proposed restructuring and to negotiate with a view to entering into a new super senior term loan facility with a further maturity extension.

It is also proposing two year maturity extensions via the new senior secured notes and the new senior notes and the reduction of the cash interest burden via partial equitisation of the senior notes and reduction in the cash pay notes coupons.

It also flagged enhanced noteholder protections with new senior secured notes receiving a tighter covenant regime.

The parties said the restructuring was being announced as despite recent improvements in operational and financial performance, with care quality ratings, customer satisfaction and occupancy being above historical norms, the business has faced significant industry-wide challenges over the past five years, which have adversely impacted earnings.

These challenges in the health care services sector include historical and on-going underfunding, increased regulation and related compliance obligations and costs, and own staff shortages resulting in an increase in agency costs.

The factors outlined above contributed to a decline in reported EBITDAR from £143.9m for FY2013 to a low point of £88.5m for FY2015.

Despite the industry-wide challenges, the management and colleagues have delivered an operational turnaround over the last two years that has resulted in significant operational and financial improvements, including an increase in EBITDAR from the 2015 low point to £99.9m for LTM to June 2017.

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