The recent economic problems of nursing home company NHP have been well documented. Now, Fitch has downgraded a tranche on one of its three securitizations in the Care Homes series. The latest development follows on from the calls from NHP shareholders for Richard Ellert, founder and chief executive of the company and the key figure in its ventures into the asset-backed market, to resign his post.
Reports suggest that one major cause of concern among shareholders has been Ellert's decision to borrow GBP569 million ($860 million) from bond issues, which they feel could leave the company overstretched in the future, bearing in mind the difficulties facing NHP at this time. The company has seen a collapse in its share value and a rise in operating costs at the same time as occupancy in its homes is falling.
The downgrade from BBB to BB-plus on the GBP40 million A2 tranche of the GBP100 million Care Homes No.1 deal comes as no surprise. Duff & Phelps Credit Rating Co., now merged with Fitch, placed the deal - launched in April 1997 and arranged by NatWest Markets - on ratings watch negative in March (ASRI 3/27/2000 p.3) due to concerns over the underlying performance of the transaction.
Profit margins, which were expected to be 30% when the deal was first rated, have fallen to 26%, and occupancy levels have also fallen beyond the anticipated figure. Consequently, the average operator rent cover on the bonds has fallen below the required level, and Fitch acted accordingly. As yet, however, the agency has not taken action on the GBP60 million AAA-rated tranche on the deal, or any notes from the second and third deals in the series.
"Following the merger, Fitch has again reviewed this transaction," said Benoit Vanpoperinghe, an assistant director at Fitch in London. "We concluded that the current rent coverage ratio for the Class A2 notes did not warrant a BBB rating and a BB-plus rating was more appropriate.
"Despite NHP's problems and press speculation, the market should not overreact and over the long term Fitch expects the bonds to perform," Vanpoperinghe added. "The level of rent received by NHP has not significantly declined, merely the profit margins of operators. The transactions have some potential tolerance to sustain a degree of rent reduction.
