Bright Horizons Family Solutions LLC -- Moody's revises Bright Horizons' outlook to Stable from Negative; Affirms B1 CFR

Rating Action: Moody's revises Bright Horizons' outlook to Stable from Negative; Affirms B1 CFRGlobal Credit Research - 25 Mar 2021New York, March 25, 2021 -- Moody's Investors Service, ("Moody's") affirmed Bright Horizons Family Solutions LLC's ("Bright Horizon") B1 Corporate Family Rating ("CFR"), B1-PD Probability of Default Rating ("PDR"), and the B1 rating for its first lien credit facilities (revolver and term loan). Concurrently, the Speculative Grade Liquidity Rating was upgraded to SGL-1 from SGL-2. The outlook is revised to stable from negative.The revision of outlook to stable from negative reflects Moody's expectation that operating performance including enrollment and center occupancy rates will continue to recover in 2021 as a higher share of the public receives vaccinations and rising employment increases the demand for childcare. Good cost management helped the company generate $125 million of free cash flow in 2020 despite the meaningful revenue decline, and the company would have generated about $40 million even if excluding payments received from government support programs and the CARES Act. Bright Horizon's Moody's lease adjusted debt-to-EBITDA leverage stood at about 5.7x for the LTM period ended December 30, 2020 and is expected to decline to below 4.5x over the next 12 to 18 months.The revision of outlook to Stable also reflects our Moody's view that Bright Horizon has very good liquidity over the next year, which resulted in the upgrade of its Speculative Liquidity Rating to SGL-1 from SGL-2. Liquidity is supported by $384 million cash at year end 2020, access to a $400 million revolver (undrawn) expiring in July 2022 and expectation for ample cushion within the net debt to EBITDA first lien covenant. Moody's also expects the company to generate free cash flow of about $100 to $120 million in 2021, which will provide ample coverage for the required annual amortization of $10.75 million for its first lien term loan ($1.03 billion outstanding at year end 2020) maturing in November 2023. The stable outlook also reflects Moody's expectation that the company will actively seek to refinance its revolver well ahead of its expiration in 2022.Moody's took the following rating actions:Ratings Affirmed:..Issuer: Bright Horizons Family Solutions LLC.... Corporate Family Rating, affirmed B1.... Probability of Default Rating, affirmed B1-PD.... Senior Secured First Lien Bank Credit Facility (Revolver and Term Loan), affirmed B1 (LGD3)Ratings Upgraded:..Issuer: Bright Horizons Family Solutions LLC. Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-2Outlook Actions:Issuer: Bright Horizons Family Solutions LLC....Outlook, revised to Stable from NegativeRATINGS RATIONALEBright Horizons' B1 CFR reflects its moderately high leverage with Moody's lease adjusted debt-to-EBITDA of about 5.7x for the LTM period ended December 31, 2020. Moody's expects leverage will decline to below 4.5x over the next 12 to 18 months due to an earnings recovery driven by a recovery in employment that will increase the demand for childcare services. The rating is also constrained by business risks including exposure to general economic conditions and cyclical employment. The rating also incorporates Bright Horizon's relatively high level of capital expenditures as well as the company's history of share repurchase activities. However, the rating is supported by the company's market-leading position in the employer-sponsored child-care space, good diversification by customer and industry verticals, and relatively long-term contracts. The rating also reflects Bright Horizon's track record of solid free cash flow generation and its very good liquidity. Furthermore, the rating incorporates the favorable long term demographic social factor related to increasing percentage of dual income families as well as increased focus on early childhood education.The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of Bright Horizons from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Specifically, the weaknesses in Bright Horizon's credit profile, including its exposure to discretionary employment level and consumer spending have left it vulnerable to shifts in market sentiment in these unprecedented operating conditions and the company remains vulnerable to the ongoing coronavirus pandemic and social distancing measures. Moody's expects the coronavirus concern for the childcare industry will start to subside in the second half of 2021 once a growing share of the public has been vaccinated.Moody's views Bright Horizons' governance risk as low. Moody's expects the company will continue to maintain a moderately conservative financial policy. Bright Horizon does not currently pay regular dividends and typically utilizes free cash flow for acquisitions and share repurchases. The company favorably issued $250 million of equity in April 2020 to bolster the cash position, which demonstrates credit support and bolstered liquidity.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's view that Bright Horizon's Moody's lease adjusted debt-to-EBITDA leverage will decline to below 4.5x over the next 12 to 18 months as a result of an earnings recovery. The stable outlook also reflects Moody's expectation for very good liquidity over the next year and that the company will re-finance its revolver well ahead of the July 2022 expiration date.The ratings could be upgraded if operating performance continues to improve such that the company resumes revenue and earnings growth with Moody's adjusted debt-to-EBITDA leverage maintained below 4.0x and free cash flow to debt maintained in the low teens percentage. Additionally, the company would need to demonstrate a conservative approach with respect to acquisitions and shareholder-friendly activities.The ratings could be downgraded if operating performance fails to improve as expected with Moody's adjusted debt-to-EBITDA leverage sustained above 5.0x. A material debt-financed acquisition, aggressive share repurchase activity, or liquidity deterioration could also pressure the ratings.The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Bright Horizons Family Solutions LLC ("Bright Horizons" - an indirect wholly owned subsidiary of Bright Horizons Family Solutions Inc.") based in Newton, Massachusetts, is a provider of employer-based childcare services, back-up dependent care, and other educational advisory services. As of December 31, 2020, the company operated 1,014 childcare and early education centers (651 in North America, 363 in Europe) with the capacity to serve over 114,000 children in the United States, the United Kingdom, the Netherlands, and India. In 2020, the publicly traded company generated approximately $1.5 billion in revenues.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. 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For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Joanna O'Brien Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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