Duff & Phelps Credit Rating Co. announced recently that it is monitoring closely the performance of the GBP100 million ($157 million) Care Homes No. 1 deal, launched in April 1997 by NHP, the U.K.'s largest owner of nursing homes. The deal was lead managed by NatWest Markets.

The agency has placed the GBP40 million A2 subordinated tranche, rated BBB, on ratings watch down, while the AAA senior tranche remains unaffected.

It should not come as a surprise that the performance of this transaction, which backed by nursing home leases and the properties themselves, is under scrutiny. The industry has been in trouble for some time - a fact that DCR noted last year - and NHP has being going through a particularly difficult period.

In the last 12 months, NHP has seen its value collapse from 208.5 pence per share to 38 pence per share. And outside of its commitments to paying holders of its three securitization issues - worth GBP569 million in total issuance - it is in debt to the tune of GBP140 million.

In February, Northern Rock called off talks with NHP over a proposed sale of nursing homes, and NHP has now had a freeze imposed on any further acquisitions. It has also brought in accountants KPMG to review its business and work on its future financial strategy.

DCR finally decided to act because the expected operating profit margins of NHP have fallen from 30% to 26%, which could filter down and undermine the performance of its secured bonds.

"For operators who are highly leveraged though sale and leaseback funding, a relatively small decline in operating profit margins will have a large impact on the ability of each home to cover rental obligations," the agency noted. "The ability of the BBB notes to absorb a substantial further deterioration in profitability has been reduced."

However, despite these problems a downgrade of the notes is not imminent, said Richard Gambel, an analyst in DCR's London office. "At this time, I would not say that the situation is critical," he said. "Most of the care homes in the portfolio are performing well, and there is sufficient protection of the notes from overcollateralization."

Securitization is central to NHP's funding strategy. DCR has taken no ratings action on its other two deals.

Deals backed by nursing home leases or revenues have for the last few years been a mainstay of sterling-denominated, long-dated, fixed-rate securitization. It is unclear what effect, if any, the problems surrounding NHP and the placement of the notes on watch will have.

It may encourage issuers, such as BUPA and Westminster Healthcare, who are owner/operators of nursing homes to differentiate themselves further from the likes of NHP, which only own the homes and are therefore exposed to the risk of operator performance and operator bankruptcy.

NHP was unable to comment before ASRI went to press.

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