Care UK Health & Social Care plc -- Moody's downgrades Care UK's rating by one notch to B2; outlook negative

Frankfurt am Main, November 14, 2012 -- Moody's Investor Service has today downgraded the corporate family rating (CFR) and probability of default rating (PDR) of Care UK Health & Social Care Investments Ltd by one notch to B2. At the same time Care UK Health & Social Care plc'sGBP 250 million senior secured notes have been downgraded to B3 and the announced increase of the notes by GPB 75 million was assigned a B3 rating. The outlook on the ratings is negative.

The rating action concludes the review for a possible downgrade initiated by Moody's on 30 August 2012 and reflects an increase in operating lease commitments and the recently announced largely debt-financed acquisition of HWH Group Limited ("Harmoni").

RATINGS RATIONALE

The downgrade is prompted by Care UK's increasing pace of debt funded external growth over the last 12 months. The take over of a large leasehold portfolio from Southern Cross, smaller acquisitions of freehold properties and a continued large development program have increased Care UK's net debt as reported as well as its operating leasing liabilities, which Moody's adds back to debt. Excluding the Harmoni acquisition and without considering the impact of recently won Suffolk contract, reported nominal lease obligations have increased by materially over GBP 200 million (to some GBP 360 million on nominal undiscounted basis) compared to last year, against relatively flat operating results.

Whereas we recognize that lease adjusted debt would tend to overstate leverage in the short-term, given delays in contribution from newly developed and currently restructured leaseholds, we believe that Care UK's gross leverage (Moody's adjusted) might remain over 6.0x over the next couple years. Gradual deleveraging would only be possible on the back of synergies realization (in case of Harmoni, please see Issue Comment dated November 7th, 2012) and rapidly improving contribution from existing and new properties, which, however, would be partly offset by higher lease payments which we expect to almost double in the next several years as compared to average 2011/12 levels.

Given the overall long life of Care UK's leasing contracts, Moody's adjustment to debt is significant based on reported 2012 figures, accounting for some GBP 180 million based on the estimated net present value of the operating leases.

Care UK's B2 rating is a reflection of (i) the company's solid market position as a leading private provider of various outsourced healthcare and social care services in the UK; (ii) the stable and recurring revenue and cash generation basis of the services provided and the further growth potential stemming from favourable demographics and the continued outsourcing of public services to private operators; and (iii) expected positive contribution from newly developed and restructured properties which is currently not reflected in trading figures.

At the same time, the rating is constrained by (i) the relative small scale of the company; (ii) its relatively high financial leverage and weak financial metrics (RCF/Net debt of below 5%, EBITA/Interest Cover below 1.0x and Debt/EBITDA trending above 6.0x); (iii) the constraints on the UK healthcare budget and resulting pressure on profitability of renewal contracts; and (vi) the relatively high capital intensity, and the ongoing negative free cash flow generated due to ongoing modernization and extension programmes and required funding needs with an increasing share of leasehold properties in the portfolio, resulting in limited deleveraging profile.

What Could Change the Rating

A positive rating action is currently unlikely. An upgrade would require a sustained period of maintaining profitability and cash flow generation at a high level, with a subsequent reduction in leverage, such that Care UK's adjusted debt/EBITDA ratio improves below 5.5x and/or EBITA/Interest exceeds 1.4x with RCF/Net Debt trending towards 10%.

Negative pressure could be exerted on the rating in the event of (i) Care UK failing to reduce debt/EBITDA ratio below 6.25x over the next 12-18 months; or (ii) EBITA/Interest falls below 1.0x or iii) Company continues to generate negative FCF, maintaining aggressive debt-funded acquisition/expansionary capex profile.

The principal methodology used in rating Care UK Health & Social Care Investments Ltd and Care UK Health & Social Care plc was the Global Healthcare Service Providers Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Care UK is a leading independent provider of health and social care services in the UK. The company generated annual revenues of GBP490 million (financial year ending September 2012).

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Alex Verbov Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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