Thu 10/08/2020 16:41 PM
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Relevant Items:
Bright Horizons Debt Documents
Bright Horizons Covenants Tear Sheet, Debt Document Summaries

Bright Horizons Family Solutions Inc. provides childcare and early education services, primarily under multiyear contracts with employers who offer childcare as well as other services as part of their employee benefits packages. Bright Horizons Family Solutions LLC, an indirect wholly owned subsidiary, is the borrower under a $400 million first lien revolver (undrawn as of June 30) and a $1.04 billion first lien term loan executed under the same agreement. Continue reading for the Covenants by Reorg team's Bright Horizons covenant analysis, and request a trial to access our covenant analysis of hundreds of other credits

Two amendments in April and May increased revolver commitments from $225 million to $400 million, increased the maximum margin under the revolver from 1.75% to 2.25%, increased the revolver’s LIBOR floor from 0% to 0.75%, and provided relief under the agreement’s financial covenant, as discussed further below.

The company’s capital structure as of June 30 is as follows:
Bright Horizons covenant analysis capital structure from Covenants by Reorg

 
Recent Events

On March 18, Bright Horizons reported that it had closed more than half of its U.S. centers in response to the Covid-19 outbreak. To increase liquidity, rather than drawing on its revolver, the company in April privately placed with Durable Capital Partners approximately 2.1 million of common shares at a price of $116.90 per share, for gross proceeds of approximately $250 million.

In its 10-Q filed Aug. 10, the company reported that of its 1,075 childcare centers worldwide, which had the capacity to serve 120,000 children, more than 400 were open as of June 30 and had capacity to serve about 50,000 children. The 10-Q stated the company plans to continue a phased reopening and anticipates that a significant majority of its centers will reopen by Sept. 30, 2020. In an August investor presentation, the company stated that as of July 31, about 725 centers (65%) were open and that the company anticipated having more than 85% of centers open by Sept. 30.

As of June 20, the company’s liquidity was approximately $670 million, comprising $270 million of unrestricted cash and $400 million of revolver availability. Company-reported LTM adjusted EBITDA was approximately $337 million as of June 30, as compared with adjusted EBITDA of $395 million for fiscal year 2019. Adjusted EBITDA for the quarter ended June 30 was approximately $60 million, as compared with $106 million for the same period in 2019.
Credit Agreement Amendment

First lien leverage covenant - Before the April amendment, the company was subject to a quarterly 4.25x net first lien leverage covenant, which permitted uncapped cash netting and was for the benefit of revolver lenders only. According to the June 30 10-Q, the company was in compliance with the covenant as of March 30. Net first lien leverage ratio was approximately 2.3x as of June 30, using reported LTM adjusted EBITDA of $337 million as a proxy for covenant EBITDA and using pre-amendment methodology. Had the revolver been fully drawn, net first lien leverage ratio would have been approximately 3.5x as of June 30.

The April amendment updated the leverage covenant by replacing the 4.25x net first lien leverage test with total first lien leverage tests, which permit no cash netting. The amended covenant is as follows:
Bright Horizons covenant analysis amended covenant from Covenants by Reorg

By using a gross test rather than a net test, the covenant now prevents the company from drawing on its revolver and then holding the draw proceeds on its balance sheet with no concomitant increase in the ratio. As of June 30, the company’s total first lien leverage was 3.1x. If the revolver were fully drawn, total first lien leverage would have been 4.3x as of June 30.

Other covenant conclusions - The credit agreement’s restrictive covenants generally contain flexibility for the company to incur additional debt or, if needed, transfer assets to nonguarantors or unrestricted subsidiaries. As of June 30, the agreement’s debt and lien covenants permit the company to incur approximately $910 million of additional first lien debt (including a full draw on the revolver), $931 million of junior lien debt and $1 billion of unsecured debt. Nonguarantor subsidiaries can also incur about $611 million of structurally senior debt (with some overlap in capacity amounts).

As to the potential for value leakage, the credit agreement contains $597 million of capacity to transfer value to nonguarantor subsidiaries plus any additional capacity under a builder basket that builds by 50% of cumulative consolidated net income starting Oct. 1, 2016. Operations outside of North America accounted for 21% consolidated YTD revenue as of June 30. The agreement also contains at least $637 million of capacity to transfer value to unrestricted subsidiaries, which amount overlaps with the $597 million figure and permits about $226 million of dividends. A portion of that capacity is attributable to a J.Crew-like “proceeds” basket, which effectively converts a carve-out for investments in non-loan parties into a general-use investment basket that could be used to transfer assets to unrestricted subsidiaries.

--Jeff Brenner
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