DBRS Assigns Issuer Rating and Confirms Debentures Rating of Leisureworld Senior Care LP

DBRS Limited (DBRS) assigned an Issuer Rating of A (low) with a Stable trend to Leisureworld Senior Care LP (Leisureworld or the Company). DBRS also confirmed the rating of the Series B Senior Secured Debentures (the Debentures) at A (low) with a Stable trend. The Issuer Rating is DBRS’s assessment of the probability of default of the issuer and is generally equivalent to the rating on senior debt for investment-grade credits. Leisureworld continues to exhibit prudent financial management and produce sound operating results, with leverage and debt service in line with expectations.

The Company continues to operate its long-term care (LTC) homes at a high level, as indicated by the Company’s quality results, which are generally better than the provincial average. Demand for LTC homes remains strong, supported by favourable demographics, with a waitlist of approximately 32,000 LTC beds. Leisureworld reported solid financial results for year-to-date (YTD) Q3 2018, as well as for YE2017, benefiting from stable occupancy rates and tight operating cost management. Average overall occupancy remained strong at 98.2% as of Q3 2018 and 98.4% in F2017, reflective of strong demand in the sector.

During F2017 and YTD 2018, Leisureworld’s prudent management of operating costs helped EBITDA grow at a steady pace, which supported an improvement in credit metrics. The adjusted debt service coverage ratio (DSCR) stood at 2.9 times (x) YTD Q3 2018 and 2.8x in F2017, in line with expectations at the time of the issuance of the Debentures. DBRS expects EBITDA to exhibit a long-term average annual growth rate in line with the consumer price index, driven by increases in per diem accommodation rates and preferred accommodation rates. The Debentures benefit from a principal reserve fund where contributions are made into the fund at least semi-annually to reach a predetermined minimum balance of $45.5 million, to be used for redeeming a portion of the outstanding principal at the maturity date in 2021. With consideration of deposits into the principal reserve fund, which partially mitigates the refinancing risk, the pro forma DSCR is approximately 2.9x, aligning with the A (low) ratings.

A rating upgrade is unlikely at this time, given the fairly tight funding envelope within which the Company operates, the limited ability to grow revenues and the refinancing of its Debentures in 2021. While no debt increases are currently planned, DBRS notes that a notable increase in future debt requirements causing a material decline in pro forma adjusted DSCR levels could result in an adverse rating action. In addition, in the event that budgetary or regulatory challenges at the Ministry of Health and Long-Term Care materially stress the Company’s funding envelope on a protracted basis, this could also lead to negative ratings pressure.

Notes:
All figures are in Canadian dollars unless otherwise noted.

The principal methodology is General Corporate Methodology, which can be found on dbrs.com under Methodologies & Criteria.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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