Sept 13 - Fitch Ratings has maintained Titan Europe 2007-1 (NHP) Limited’s notes on Rating Watch Negative (RWN), as follows:
GBP42.15m class B secured floating-rate notes due 2017: ‘BB’; maintained on RWN
GBP42m class C secured floating-rate notes due 2017: ‘B+'; maintained on RWN
GBP58m class D secured floating-rate notes due 2017: ‘B-'; maintained on RWN
GBP60m class E secured floating-rate notes due 2017: ‘CCC’
The maintained RWN is driven by the lack of further material information being made available to Fitch, most notably with regards to the detailed operating performance of the care home portfolio (including central costs); the quality of the homes providing details about necessary catch-up capex; and a bottom-up business plan for HC-One. Fitch understands that more information will be provided by the borrower by Q412 after HC-One has prepared a full three-year turnaround plan and the business completes its first 12 months of trading. The agency expects to resolve the RWN after this information has been received and analysed. Some or all of the rated notes are likely to be downgraded.
Some information was provided on 27 July 2012 suggesting a continued under-performance of the former Southern Cross homes (now operated by HC-One) compared to the industry average.
At the last interest payment date (IPD) in July, further funds were retained by the borrower with more retentions expected at the next IPD. Consequently, subordinated forward interest rate swap and note payments for classes B and below have been deferred again and the servicer advance facility has been drawn down. The total amount of payment deferrals (including servicer advance facility drawings) has accumulated to GBP54m, about GBP12m more than at the previous IPD in April.
Fitch believes it may be challenging to materially improve the operating performance of HC-One in a short period of time given the current market environment with public finances scarce and HC-One’s low exposure to the more lucrative self-pay market (circa 21% of overall turnover). Hence, interest payments on the class B notes and below may keep deferring until final maturity. However, the transaction still benefits from a tail period of four years and four months prior to the legal final maturity of the notes in January 2017, which leaves some time for the performance to stabilise, and a sale/refinancing solution to be found.
To resolve the RWN, Fitch needs more information as to the detailed operating performance and conditions of the care homes, as well as more clarity from Court Cavendish with regard to its strategy for HC-One. Fitch may decide to take further rating actions (possibly multi-notch downgrades) once this information is received, notably if the transaction’s sustainable rent is not expected to increase materially within Fitch’s forecasting period. Given the preliminary information provided thus far, it is in increasingly likely that the class B notes could be downgraded to the ‘B’ rating category.
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).