-- U.S.-based childcare center operator Bright Horizons Family Solutions
LLC plans to put in place a new $815 million term loan and $100 million
revolving credit facility.
-- Proceeds will be used to refinance its existing $430 million in term
loans, $300 million of 11.5% notes, and $75 million undrawn revolving credit
-- We are assigning the proposed $915 million senior secured credit
facility our preliminary 'B+' rating with a recovery rating of '3'. At the
same time, all other ratings, including the 'B' corporate credit rating on
Bright Horizons Capital Corp., remain on CreditWatch with positive
-- If both the refinancing and planned IPO transactions are completed, we
expect to raise the corporate credit rating to 'B+', subject to final terms.
On Jan. 14, 2013, Standard & Poor's Ratings Services assigned Watertown,
Mass.-based childcare center operator Bright Horizons Family Solutions LLC's
$915 million senior secured credit facilities a preliminary 'B+' rating with a
recovery rating of '3', indicating our expectations for meaningful recovery
(50% to 70%) in the event of a payment default. The senior secured credit
facility consists of a $815 million term loan due 2020 and a $100 million
revolving credit facility due 2018.
Proceeds of the credit facility will be utilized to repay existing $430
million in term loans, $300 million of 11.5% senior subordinated notes due
2018, and $75 million undrawn revolving credit facility due 2014. Proceeds of
the planned IPO will be used to repay the existing $198 million 13%
pay-in-kind notes due 2018.
At the same time, all other ratings, including the 'B' corporate credit
rating, remain on CreditWatch with positive implications, where they were
placed on Nov. 16, 2012. We expect to raise the corporate credit rating to
'B+', pending the completion of both the refinancing and IPO transactions. If
the IPO is not completed on a timely basis, we will affirm the 'B' corporate
We view Bright Horizons' business risk profile as "fair" because of its good
position in employer-sponsored centers, some sensitivity of capacity
utilization rates to high unemployment, and highly competitive conditions in
the fragmented child care business. We view the company's financial risk
profile as "highly leveraged" because of its high debt-to-EBITDA ratio,
acquisitive growth strategy, and weak cash flow measures. We assess the
company's management and governance as "fair."
Bright Horizons is a midsize company that is the largest U.S. provider of
employer-sponsored, workplace-based childcare, five times larger than its
nearest competitor. Bright Horizons is also the third largest operator of
childcare centers, allowing for clustering and economies of scale in marketing
and management. Childcare services are provided by clients to their employees
to enhance employee retention. Employer-sponsored centers, which account for
two-thirds of the total, have been less volatile than retail-based
competition. Fixed costs are relatively high, because of significant lease
costs and the company's commitment to maintaining high center staffing levels
to provide superior customer service. Bright Horizons serves clients across a
diverse group of industries, in 42 states, and also a growing presence in the
U.K., which accounts for about 15% of EBITDA.
In the third quarter, revenue and EBITDA outperformed our expectations,
growing 10% and 29%, respectively. The EBITDA margin was relatively high at
15.4% for the 12 months ended Sept. 30, 2012, continuing a more than 200
basis-point increase over the past three years. Margin gains reflect steady 3%
to 4% tuition rate increases, improving critical mass of international
operations, and growth of higher-margin back-up care services, which account
for about one-third of EBITDA versus 25% in 2009.
We expect lease-adjusted debt leverage, pro forma for the IPO and refinancing,
will decline to 5.4x from 5.9x as of Sept. 30, 2012. Pro forma lease-adjusted
interest coverage improves sharply to 3.2x from 1.9x, reflecting a significant
reduction in the average cost of debt and lower debt balances. The IPO will
further improve its adequate liquidity position as the 13% pay-in-kind debt
requires cash interest payments commencing in June 2013. The company is also
required to make a $98 million principal redemption in June 2013, based on the
accretion of the notes since their issuance in 2008. We expect steadily
growing demand for its services will lead to improving credit measures over
the intermediate term, despite the company's acquisition orientation and high
capital spending for new center openings.
Pro forma for the IPO and refinancing, we expect Bright Horizons would have
about $46 million in cash as of Sept. 30, 2012.
We expect the company to generate roughly $80 million of discretionary cash
flow in 2013, similar to the level generated in the 12 months ended Sept. 30,
2012, which benefited from favorable working capital trends resulting from
recent acquisitions. The company is initially subject to a 50% excess cash
flow sweep, which steps down to 25% if senior leverage is substantially
reduced. We expect the company to convert 40% of EBITDA to discretionary cash
flow in 2013, which we expect to be used for acquisitions and debt reduction.
Intermediate-term maturities are modest, limited to 1% annual amortization of
the term loan.
The new term loan does not have maintenance financial covenants. The new
revolving credit agreement includes a maximum net first-lien leverage covenant
of 5.75x, which initially steps down to 5.5x on Dec. 31, 2013. It applies only
when the company borrows 25% or more of the availability of its revolving
credit facility. Pro forma net first-lien leverage, as defined in the credit
agreement, was 4.3x at Sept. 30, 2012, providing roughly 30% headroom. We
expect that the company will be able to maintain an adequate margin of
compliance despite step-downs over the next few years.
We expect to raise the corporate credit rating to 'B+' and remove the ratings
from CreditWatch listing upon successful completion of both the planned
refinancing and the IPO. If the company is unable to complete the IPO, we
would likely affirm the 'B' corporate credit rating and revise the outlook to
Related Criteria And Research
-- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Bright Horizons Capital Corp.
Corporate Credit Rating B/Watch Pos/--
Bright Horizons Family Solutions LLC
Senior Secured BB-/Watch Pos
Recovery Rating 1
Bright Horizons Family Solutions LLC
$815M term loan due 2020 B+ (prelim)
Recovery Rating 3 (prelim)
$100M revolver due 2018 B+ (prelim)
Recovery Rating 3 (prelim)