Elli Investments Ltd -- Moody's assigns B2 Corporate Family Rating to Elli Investments Ltd. (Four Seasons Health Care); outlook stable.

Frankfurt am Main, June 12, 2012 -- Moody's Investors Service has today assigned a B2 corporate family rating (CFR) and probability-of-default rating (PDR) to Elli Investments Ltd. ("Elli" or "the company"), an entity beneficially owned by private equity investor Terra Firma. Concurrently, Moody's has assigned provisional ratings to the company's proposed issuance of GBP350 million worth of secured notes (rated (P)B1) due in 2019 and GBP175 million worth of unsecured notes (rated (P)Caa1) due in 2020. In addition, the rating agency has assigned a rating of (P)Ba2 to the company's GBP40 million secured super senior revolving credit facility maturing in 2018. The rating outlook is stable. This is the first time that Moody's has rated Elli.

The ratings are contingent upon Elli's success in closing its proposed acquisition of Four Seasons Health Care Holdings Limited ("FSHC"), which is subject to regulatory approval, and the incorporation of the above-mentioned notes in the financing package put in place to partially finance the transaction. Until the time of closing the proceeds from the notes issuance will be held in escrow. Moody's understands that the remainder of the acquisition price, approximately GBP335 million, will be injected as common equity or deeply discounted non-cash paying bonds. Elli does not have any other business activities other than those carried out by FSHC.

Moody's issues provisional ratings in advance of the final sale of securities and these reflect the rating agency's credit opinion regarding the transaction only. Upon a conclusive review of the final documentation, Moody's will endeavor to assign definitive ratings to the instruments mentioned above. A definitive rating may differ from a provisional rating.

RATINGS RATIONALE

The B2 rating reflects Moody's expectation that, following the closing of the transaction, the company will exhibit high leverage, such that its debt/EBITDA ratio will be approximately 5.5x (based on pro-forma EBITDA of GBP102 million as per March 2012, and adjusted by capitalizing estimated annual operating leases of approximately GBP52 million at 6x). "While the relatively weak initial credit metrics and large share of leasehold properties in the portfolio are a constraining factor on Elli's rating, Moody's also notes the company's attractive business profile, with market-leading positions and stable and recurring revenue base," says Alex Verbov, Vice President and Moody's lead analyst for Elli's.

Following the acquisition of parts of Southern Cross's portfolio in 2011, Elli has become the largest UK operator of elderly care, with pro-forma revenues of around GBP685 million. Although the Company also runs Specialist hospitals and care centers with some 1,200 beds, elderly care accounts for over 85% of both revenues and EBITDA contribution.

Increased funding constraints on the public healthcare system and regulatory compliance costs are likely to continue having a negative impact both on the UK healthcare industry and Elli. In the past, changing customer mix and the gap between fee increases and cost inflation led to gradual EBITDA margin declines. Going forward, Moody's expects Elli to at least maintain its absolute profitability levels and benefit from longer-term growth potential due to favourable demographics as well as gradual increase in occupancy following the integration of recent portfolio additions via Southern Cross and Care Principles transactions.

Estimated pro-forma EBITDA margins of around 15% reflect a significant share of leasehold properties (EBITDA margins adjusted for leases are 7% higher at c. 22%), and highlight Elli's higher operational leverage than seen for largely freehold operators. This is being partly mitigated by the variable terms agreed on a large portion of leases from the Southern Cross acquisition, which reduces both the downside and the upside impact for the Company. Moody's notes that the rating incorporates expectation for a relatively slow deleveraging profile of the Company and the constraining impact that the large leasehold portfolio has on the leverage metric.

LIQUIDITY

Moody's views Elli's liquidity position as adequate. Whereas an estimated GBP 13 million cash balance available at closing is largely earned marked for a GBP10 million contingent payment due in 2013 to the selling shareholders if 2012 EBITDA reaches GBP106 million, the Company does not have material working capital needs, will have access to GBP40 million of undrawn revolver line and is expected to generate positive free cash flow. The revolver facility is subject to a material adverse change clause and a financial covenant, which has generous headroom, in the rating agency's view. We would expect that following the closing, Elli will continue to improve its liquidity position via increase in cash balances and would not be aggressively pursuing acquisitions / development capex projects until it has achieved an adequate cash balance.

STRUCTURAL CONSIDERATIONS

The GBP40 million secured super senior revolving credit facility and the GBP350 million worth of senior secured notes benefit from pari-passu ranking guarantees from all material group entities, representing a minimum of 80% of all the group assets and EBITDA at closing. While both instruments benefit from a pledge of essentially all group assets, the (P)Ba2 rating assigned to the revolver (Loss Given Default rating of LGD1, 1%) is a reflection of the instrument's super seniority in the event of an enforcement of the collateral, with only the remaining proceeds to be applied to the secured notes ((P)B1, LGD 3, 33%). The (P)Caa1 (LGD5, 85%) rating on the GBP175 million worth of senior unsecured notes reflects their junior ranking behind a sizable portion of Elli's secured debt and the subordinated nature of the guarantees in place.

Whereas the sizing of the revolver line is relatively moderate compared to other UK healthcare credits, it may be increased going forward by up to GBP35 million subject to corresponding increases in EBITDA (i.e. total revolver not to be higher than 40% of EBITDA).

Moody's notes that the proceeds of the notes issuance will be placed in an escrow account (unguaranteed but with the proceeds being pledged as security) and will only be released upon closing of the acquisition. If the acquisition does not materialize, Elli will be required to redeem the notes at a redemption price of 100% of the initial issue price plus accrued and unpaid interest, which will be prefunded into the escrow account.

RATING OUTLOOK AND TRIGGERS

The stable outlook reflects our expectation that no significant changes in leverage are likely in the next 12-18 months, partly attributable to the stabilizing impact of lease capitalization on the leverage metric volatility.

Negative pressure could be exerted on the rating in the event of increasing margin pressure and gross leverage exceeding 5.75x (pro forma per 12/2011: 5.5x) and/or EBITA/Interest Cover falling below 1.4x (pro forma per 12/2011:1.4x). Aggressive acquisition, development and dividend policies could also be triggers for a downgrade.

An upgrade would require a sustained period of maintaining profitability and cash flow generation at a high level, with a subsequent reduction in leverage, with for example debt/EBITDA improving materially below 5.0x and/or EBITA interest cover increasing over 1.8x.

The principal methodology used in rating Elli was the Global Healthcare Service Providers Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

FSHC is the largest independent provider of elderly care in the UK with estimated pro-forma revenues of around GBP690 million.

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Alex Verbov Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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