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Rating Agency Downgrades UK Care Home Bond To Junk Status

28 Feb 2013

Southern Cross' corpse leaves the grave and starts biting successor HC-One - major employer of Filipino care workers 

Titan bondholders could be headed for a freezing cold bath while outlook for British care home operators looks decidedly bleak

An innocuous looking report into a multi-million pound bond issued in Ireland 6 years ago points the way to a major crisis in Britain's care home industry

The report, which is by way of a press release from credit ratings agency Fitch, explains why it [Fitch] has downgraded most of the notes in the bond issued by Titan Europe 2007-1(NHP) Ltd (the "B", "C", "D" & "E" notes) to that of junk bond status, giving them a CCC rating which is their lowest.

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This while another ratings agency, Moody's, has issued a warning on the remaining note (the "A" note), downgrading it and declaring it as "speculative".

This bond, which totals a mouth watering £638 million is due to mature in 2017, and had stopped interest payments already when still linked to the now departed calamitous Southern Cross Healthcare care home operator (SCH). The bonds were issued on behalf of Nursing Home Properties (NHP) which was part of SCH, but then became one of SCH's largest landlords in a controversial finance deal and is now morphed into HC-One care homes group as a wholly owned subsidiary of NHP. HC-One is currently the UK's third largest care home group.

HC-One in particular, and the British care home industry in general, are looking sick, mainly because of lower than expected occupancy rates, rising costs and with such a tight squeeze on revenues that they have dropped in one year (for HC-One) by 20.6% (£102.5 million (December 2011) to £81.3 million (December 2012)).

What has also been brought into focus is that in a month's time, the British government are going to release what fees they will pay care home operators where they, and local government, pay for the care of the elderly, infirm and disabled in the now almost wholly privatized care home industry. This is particularly relevant as about 80% of the residents of care homes in the UK have their fees paid by the public purse.

There have been hot tempered discussions between the care home industry and the government in consultations on this subject (see statement from Martin Green of ECCA below).

There is a not so small matter for the bond holders of the actual value of the properties themselves, reminiscent of the US sub-prime fiasco of a few years ago which was the main reason for the present global financial crisis. This is because the bonds are backed in the final analysis by the value of the properties in the portfolio. The Fitch report says that the Loan-To-Value (LTV) ratio of the properties is extremely bad; stating that:

"Under the current market valuation, the LTVs have increased to very high levels, with all rated classes over 100% i.e. 135%, 143%, 154% and 165% for the B, C, D and E notes".

Cutting through the financial jargon, this means the properties are not worth anything as much as when the original bond was issued, so as the bonds were supposedly backed by the value of the properties, the bonds are not covered totally by the asset value.

These prices have fallen through the floor, not helped by the general financial crisis and which has been added to by uncertainties in the market for British care homes.

Fitch also highlights a serious concern in respect of HC-One, this being the state of repair of the properties in its portfolio. The whole bond issue is concerned with a total of 297 properties. HC-One runs 241 care homes and Fitch says of serious concern is the state of repair of those particular properties. Balita Pinoy understands this started in the final drama of SCH's collapse with maintenance being a very low priority, but that matters have improved and are being addressed by HC-One.

The ratings report from Fitch, which is reproduced below in full, basically says that if you hold the bonds and run out of toilet tissue, well you can guess the rest.

The ratings report from Moody's, also reproduced below, does not go quite that far but there is a specific reason for that. The "A" note valued at £435 million has preferential treatment status at the time of redemption (Jan 2017), while bond holders of "B, C, D and E" notes will be last in the queue if anything falters when payment is due on their notes totalling just over £202 million. And the indications are that there is going to be a major shortfall.

The rating reports from both Fitch and Moody's on the financial health of this bond raise an intriguing question, why two separate rating agencies were asked to rate separate parts of a single bond issue? It would seem to a normal person sensible to have one group of experts analyze the entire situation, rather than two entities to look at different parts.

Two years ago, the other major rating agency Standard & Poor issued a report on the entire structure of this bond issue (when Southern Cross Healthcare were still alive), giving an analysis and rating on all the notes in the bond issue.  

The bond was originally issued on the Irish Stock Exchange in Dublin for debt relating to British care home operator SCH as tenant of the bond issuer (and the hived off) NHP who became SCH's landlords on a large slice of its properties. This was just at the time SCH's owners, American investment and private equity business Blackstone, was unloading Southern Cross at a very good profit to very willing hands in a floatation on the London Stock Exchange.

Blackstone walked away having made a handsome profit, the shares in SCH rose for a time then started to slide within year. They never stopped going down until SCH went belly-up.

SCH's business model had been one of rapid expansion, from 140 homes in 2002 to 750 homes when it finally collapsed, financed by a very controversial "sale & leaseback" policy.

This policy was that SCH would buy a care home or parcel of homes for cash then immediately sell off the freeholds, whilst renting the properties back off the new landlords. SCH would then operate purely as a care home manager/operator.

SC would easily get landlords for its properties by making the deal very attractive, with annual rent increase guarantees of 2.5%. In the short term it ran well, and was dependent on central and local government perpetually funding care costs continuing on an upward spiral.

It could not go wrong; it did.

A year later, its shares fell 98% from early 2008 to early 2011, reducing its market value from £1.1 billion to around £12 million. What had been the darling of the British stock market soon became the sick man of the UK care industry.

Occupancy rates had dropped from a healthy 92% to 84%, the biggest financial crash since the Great Depression of the 1930's had arrived but more pertinent to the care home industry was that local and central government in the UK said the rise in care costs was unsustainable. The country could not afford rising care costs and was going strip those costs down.

All the spotlight now transfers to care home operator HC-One which took over 250 of SCH's care homes, specifically those which NHP owned the freehold.

According to research by Fitch, HC-One are not even earning enough in cash flow to pay the interest on the B, C, D & E bonds alone, let alone capital repayments.

Balita Pinoy contacted HC-One to comment on this matter.


The specifics we would like answered are comments to the following points in the Fitch report:

Occupancy rate falling to 83%

Material deferred maintenance resulting in significant declines in property values.

Earnings deteriorating by 20.6% from GBP102.5m (December 2011) to GBP81.3m (December 2012).

Cash flow is currently insufficient to cover the interest on the class B, C, D, and E notes and further funds

A spokesperson for HC-One said in response to Balita Pinoy:

"There are many reasons to be optimistic. The HC-One of 2013 is a company unrecognisable to the Southern Cross of 2011. From the outset we determined that the success of the company would be measured by the quality of the care that we provide for all residents. Very significant progress has been made in that respect, despite our immensely challenging inheritance."

"HC-One has been completely ring-fenced from any NHP debt and is now a business properly funded, which has given confidence to the Government, local authorities the residents and their families. Fitch's announcement is a technical financial one - it should not distract from the fact that quality of care, the fabric of the homes, and the skills of staff have been improving every single day."

"HC-One since day one has been a company whose interests are aligned with its landlord - this provides a shared interest which is good for those that reside in HC-One-run homes. As a result, the rents charged on the homes we operate are half what they were under Southern Cross. This has made a huge difference to stability."

"NHP and its lenders have invested £55m into HC-One to support an upgrade of the homes, additional care staff and training to improve the quality of care."

"As a result of investment, residents say that their physical environment has improved in a way unimaginable under Southern Cross."

"I am very optimistic at the confirmation that if necessary NHP will invest a further £29m in HC-One over the next three years, bringing total investment to £84m between 2012 and 2015. That brings huge confidence to the management team at HC-One and will hopefully do likewise for those we serve. We are so proud that HC-One has stabilised, now has a strong management team and is set to continue to recover."

"The management team at HC-One in 2013 retain the vision set out at the beginning, namely
· to launch a new company that would not suffer from the same problems of the past.
· to bring to an end the uncertainty that residents, their families and staff in all the homes had to endure
· to build a high quality integrated health and care services company providing the kindest care in Britain, the most professional staff - places where each and every one matters and each and every one can make a difference."

While the outlook for HC-One is not necessarily good, this also bodes badly for the British care home industry as a whole.

There already rows going on behind the scenes from umbrella groups and trade associations representing care home operators such as the English Community Care Association (ECCA) and the Care Providers Alliance (CPA) with the NHS London Procurement Panel (LPP) over fees to fund healthcare in both residential home and social care settings, where service users' care requirements are judged to be of ‘primary health need' therefore directly linked to the services they receive, or would otherwise receive, in hospital.

The chief executive of ECCA, Martin Green, released a statement stating that the £700 figure mentioned in this specific item (NHS Continuing Healthcare) is not sufficient.

"Neither ECCA nor the CPA agrees with the price of £700. In fact, we told the LPP, in a meeting and in writing, that we absolutely did not agree that £700 is an appropriate price to pay for CHC in London."

All care home operators will be anxiously waiting for 1 April 2013 when the new tariffs issued by the UK government will go live, as it is government funding that provides over 80% of their revenues.


Fitch Downgrades Titan Europe 2007-1 (NHP)

Balita Pinoy has highlighted some extracts in purple 

Notes Ratings Endorsement Policy
25 Feb 2013 11:18 AM (EST) Fitch Ratings-London-25 February 2013: This announcement corrects the version published earlier today, which stated an incorrect reason for the removal of the notes from Rating Watch Negative (RWN). Fitch resolved the RWN as more detailed information regarding the operating performance and the care homes' conditions has been received.

Fitch Ratings has downgraded Titan Europe 2007-1 (NHP) Limited's B, C, D and E notes and removed them from RWN. A full list of rating actions is at the end of this release.

Key Rating Drivers
The downgrades are driven by the substantial deterioration in performance, with occupancy falling to 83% as well as material deferred maintenance resulting in significant declines in property values. Consequently, the loan-to-value ratios (LTVs) of all Fitch rated classes are well above 100% (even if credit is given by valuing HC-One on a WholeCo basis). The transaction benefits from a tail period of just under four years with legal final maturity of the notes in January 2017, leaving some time for the performance to stabilise, and a sale/refinancing solution to be found. However, assuming a reasonable amount of time for this to be arranged, performance will need to improve quickly for the notes' prospects to improve.

The performance of the securitised care homes has declined further, with EBITDAR (Gross earnings) deteriorating by 20.6% from GBP102.5m (December 2011) to GBP81.3m (December 2012). Additionally, cash flow is currently insufficient to cover the interest on the class B, C, D, and E notes and further funds are expected to be withheld at the borrower level to fund necessary 'catch-up' capex investments (ca. GBP54m is expected to be withheld over FY13-15) on top of the GBP30m already withheld in 2012. This means that further servicer advance facility drawings (GBP14.5m as of January 2013) will be necessary in order to avert a note event of default.

In addition, under the current HC-One business plan, as a result of both the weaker performance and capex requirements, cash flow is forecast to be insufficient to meet the interest payments on the class B, C, D and E notes in all years to legal final maturity. All are therefore expected to defer further, with total deferrals estimated at around GBP141.3m by legal final maturity (GBP10.3m due to deferred interest on classes B, C, D, E and GBP131m due accruals on the swap ranking senior to those tranches in the priority of payments).

In terms of a possible sale or refinancing, the restructuring of the business with the incorporation of HC-One as part of the borrower group is viewed as a credit positive with the interests of the Propco and HC-One (as largest Opco/tenant) largely aligned. The transfer of the 249 homes from the dismissed Southern Cross removes considerable execution risk for a later refinancing of the whole care home company.

Under the current market valuation, the LTVs have increased to very high levels, with all rated classes over 100% i.e. 135%, 143%, 154% and 165% for the B, C, D and E notes, respectively (taking into account the senior ranking swap mark-to-market (MtM) of currently GBP183.7m). The senior ranking swap MtM is expected to decline when getting closer to maturity (assuming no further material declines in interest rates) which should benefit the refinancing/disposal chances. However, this is expected to be offset to some extent by further accruals on the Fitch rated notes and the swap so that a default is expected to remain a real possibility for all classes. A material improvement in HC-One's operating performance over and above the company's business plan would certainly mitigate such concerns. However, forecasting the care homes' performance remains challenging due to continued lack of visibility in combination with HC-One's short operating history and the state of repair of the portfolio. Furthermore, HC-One's exposure to local authority (LA) funding (around 80% of its homes are LA funded) and geographic concentration in the north of the UK (33% north of England, 14% in Scotland) pose an additional challenge to a swift recovery.

Rating Sensitivities
Moving closer to legal final maturity without having arranged an appropriate refinancing solution or property disposal could lead to further downgrades. Upgrades could be possible if refinancing/disposal arrangement progressed in combination with material performance/value improvement making a successful repayment of the Fitch rated debt by legal final maturity more likely.

Titan Europe 2007-1 (NHP) is a securitisation of 294 nursing homes and three residential properties owned by NHP, which are let on long leases to third-party operators active in the UK healthcare sector (in particular HC-One, which accounts for 84% of the estate). Notably, the transaction remains in standstill, currently until 12 April 2013.

The rating actions are as follows:

GBP42.15m class B secured floating-rate notes due 2017: downgraded to 'CCC' from 'BB'; off RWN
GBP42m class C secured floating-rate notes due 2017: downgraded to 'CCC' from 'B+'; off RWN
GBP58m class D secured floating-rate notes due 2017: downgraded to 'CC' from 'B-'; off RWN
GBP60m class E secured floating-rate notes due 2017: downgraded to 'CC' from 'CCC'


Rating Action:
Moody's downgrades one class of EMEA CMBS Notes issued by Titan Europe 2007-1 (NHP) Limited
Global Credit Research - 12 Feb 2013

London, 12 February 2013 -- Moody's Investors Service has today downgraded the following class of notes issued by Titan Europe 2007-1 (NHP) Limited (amount reflecting initial outstanding):

....GBP435.85M Class A Commercial Mortgage Backed Floating Rate Notes due 2017 Certificate, Downgraded to Ba3 (sf); previously on Jun 19, 2012 Confirmed at Ba1 (sf)

Moody's does not rate the Class B, Class C, Class D, Class E and the Class X Notes.


Today's downgrade reflects Moody's increased loss expectation for the pool since its last review in June 2012 largely due to a 15% drop in the value of the underlying nursing homes. The collateral value decline worsened the Moody's Class A note-to-value to 77% from 66%.

The performance of the underlying care homes presented during a Noteholder meeting on 1 February 2013 was somewhat worse than Moody's expected, and explains the drop in value. Nonetheless, the operations of the underlying care homes appear to have now stabilised, with a three year business plan in place that includes substantial investments of GBP 84 million until 2015 financed by the diversion of cash flows away from the securitisation and the swap counterparty to the operating company ("HC-One"). Moody's is concerned that not all the significant investment in infrastructure, capital expenditure and care standards will translate into value preservation or creation.

In Moody's view, the business plan looks convincing and achievable. However, the Class A Noteholders remain exposed to material execution and exit risk with limited influence over other transaction parties that control the timing and path of any exit and whose obligations and motivations may not necessarily be completely aligned. The chances of a successful exit via a sale or refinance are improved by the quasi corporate nature of the collateral that is likely to attract a wide range of investors and lenders (with a capital markets exit also a possibility). Execution risk is mainly related to uncertainty surrounding the HC-One business plan, but also heavily influenced by the prospects for the care home industry (including the outcome of the on-going debate about funding long-term care in the UK). With over 80% of HC-One's residents publicly funded, revenues will be sensitive to the outcome of the April 2013 Local Authority weekly fee settlements. New government regulation that imposes strict financial criteria for care home operators may negatively impact ultimate recoveries.

Moody's now gives benefit to the value of the WholeCo (i.e. the value of the operating company "opco" combined with the property company "propco") given HC-One forms part of the security, and because for the first time there is sufficient information on the operations of underlying care homes.

The key parameters in Moody's analysis are the default probability of the securitised loans (both during the term and at maturity) as well as Moody's value assessment for the properties securing these loans. Moody's derives from those parameters a loss expectation for the securitised pool.

In general, Moody's analysis reflects a forward-looking view of the likely range of commercial real estate collateral performance over the medium term. From time to time, Moody's may, if warranted, change these expectations. Performance that falls outside an acceptable range of the key parameters such as property value or loan refinancing probability for instance, may indicate that the collateral's credit quality is stronger or weaker than Moody's had anticipated when the related securities ratings were issued. Even so, a deviation from the expected range will not necessarily result in a rating action nor does performance within expectations preclude such actions . There may be mitigating or offsetting factors to an improvement or decline in collateral performance, such as increased subordination levels due to amortisation and loan re- prepayments or a decline in subordination due to realised losses.

Primary sources of assumption uncertainty are the current stressed macro-economic environment and continued weakness in the occupational and lending markets. Moody's anticipates (i) delayed recovery in the lending market, while remaining subject to strict underwriting criteria and heavily dependent on the underlying property quality, (ii) strong differentiation between prime and secondary properties, with further value declines expected for non-prime properties, and (iii) occupational markets will remain under pressure in the short term and will only slowly recover in the medium term in line with anticipated economic recovery. Overall, Moody's central global macroeconomic scenario for the world's largest economies is for only a gradual strengthening in growth over the coming two years. Fiscal consolidation and volatility in financial markets will continue to weigh on business and consumer confidence, while heightened uncertainty hampers spending, hiring and investment decisions. We expect no growth in the Euro area in 2013.


Titan Europe 2007-1 (NHP) Limited represents a true-sale securitisation of a GBP 610 million Senior A Loan extended to The Libra Borrower, and secured by a portfolio of around 300 care homes located across the UK. Additionally, a GBP 534 million Junior B Loan was provided to The Libra Borrower that has not been securitised in this transaction, but is secured by the same portfolio. HC-One Limited, a recently formed wholly-owned Subsidiary of the Libra Borrower that was created after the collapse of Southern Cross, operates 232 care homes. A mixture of third party tenants operate the remaining 62 care homes.

Moody's expects a large amount of losses on the securitised portfolio. Given the default risk profile and the anticipated work-out strategy (with a sale or refinance likely in 2015/2016), the expected losses are likely to crystallise only towards the end of the transaction term. Moody's included in its analysis a GBP 60 million estimate of prior ranking claims to account for potential liabilities arising from swap breakage costs or outstanding servicer advances.


The methodology used in this rating was Moody's Approach to Real Estate Analysis for CMBS in EMEA: Portfolio Analysis (MoRE Portfolio) published in April 2006. Please see the Credit Policy page on for a copy of this methodology.

Other factors used in this rating are described in European CMBS: 2012 Central Scenarios published in February 2012.

The updated assessment is a result of Moody's on-going surveillance of commercial mortgage backed securities (CMBS) transactions. Moody's prior assessment is summarised in a press release dated 19 June 2012. The last Performance Overview for this transaction was published on 15 November 2012.

In rating this transaction, Moody's used both MoRE Portfolio and MoRE Cash Flow to model the cash-flows and determine the loss for each tranche. MoRE Portfolio evaluates a loss distribution by simulating the defaults and recoveries of the underlying portfolio of loans using a Monte Carlo simulation. This portfolio loss distribution, in conjunction with the loss timing calculated in MoRE Portfolio is then used in MoRE Cash Flow, where for each loss scenario on the assets, the corresponding loss for each class of notes is calculated taking into account the structural features of the notes. As such, Moody's analysis encompasses the assessment of stressed scenarios.

Moody's ratings are determined by a committee process that considers both quantitative and qualitative factors. Therefore, the rating outcome may differ from the model output.


Moody's did not receive or take into account a third-party assessment on the due diligence performed regarding the underlying assets or financial instruments related to the monitoring of this transaction in the past six months.

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating.

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Tags: blackstone, care providers alliance, cpa, ecca, english community care association, fitch, hc-one, irish stock exchange, london procurement panel, moodys, nhs, nursing home properties, sch, southern cross healthcare, standard poor, titan europe 2007-1nhp ltd

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