Quality Care Properties Inc. (QCP) has made little progress toward relieving pressure on its debt service coverage ratio covenant (DSCR) of 1.75x.


  • Quality Care Properties Inc. (QCP) has made little progress toward relieving pressure on its debt service coverage ratio covenant (DSCR) of 1.75x.
  • We expect the company's covenant cushion to continue to deteriorate as its primary tenant, HCR ManorCare pays substantially reduced rent. Based on our projections, the DSCR covenant could be breached as early as the first quarter of 2018.
  • We are lowering our corporate credit rating to 'B-' from 'B'. All ratings remain on CreditWatch with negative implications given the uncertainty surrounding covenant compliance and resolution of the lease agreement default by its key tenant, HCR ManorCare.
  • At the same time, we are lowering our issue-level rating on the first-lien loan to 'B+' from 'BB-' and our rating on the second-lien notes to 'B' from 'B+'.

The downgrade reflects our view that QCP has limited cushion under its 
existing covenants and a high probability of breaching its debt service 
coverage covenant as early as March 2018 absent an amendment of its credit 
facilities or waiver of the covenants by the lenders. Over the past few 
quarters, HCR ManorCare, the company's main tenant representing 91% of its NOI 
continues to pay substantially reduced rent under its lease agreement and 
management has not made progress in obtaining an amendment, waiver, or made 
sufficient progress towards meaningful asset sales, which we view as negative 
in terms of financial policy. Although the level of rent that QCP could 
receive is uncertain, we currently estimate QCP could receive $18 million per 
month in rent from HCR, which would likely result in the breach of its DSCR of 
1.75x in the first quarter of 2018. Additionally, the downgrade reflects 
uncertainty surrounding the potential of HCR filing for bankruptcy. 

We intend to resolve the CreditWatch once we gain more clarity on the 
company's ability to alleviate covenant pressure as well as a better 
understanding of the long term sustainable rental payments (from either HCR or 
other regional operators). If the company is unable to reach an agreement to 
resolve covenant issues by year-end 2017, we could lower the rating, by more 
than one notch into the 'CCC' category to reflect heightened default risk.