H/2 Capital Partners Proposes Major Improvements To Four Seasons Health Care Stakeholder Protection, Continuity Of Care & Governance

The Low Leverage Stakeholder Plan reflects our continued preference for a consensual solution with the Group's existing private equity sponsor.  The Low Leverage Stakeholder Plan accomplishes this by making necessary and substantial improvements to the High Leverage Sponsor Plan.  The Low Leverage Stakeholder Plan achieves key stakeholder objectives, including stabilising Four Seasons' operations, improving its governance and significantly reducing its leverage – all for the overriding purpose of ensuring continuity and quality of care for its residents, over both the short and long term.

Spencer B. Haber, H/2's Chairman and Chief Executive Officer, commented:

"Like a broad group of its stakeholders, H/2 looks forward to helping Four Seasons Health Care begin a new chapter.  We firmly believe that with the right stewardship, enterprises like Four Seasons best serve their investors when they best serve their residents.  Responsible private capital understands the primacy of resident care and peace-of-mind for their families. 

Four Seasons' dedicated managers and employees are more than capable of setting an example here, right across the social care community.  While we share a mission with these talented individuals, it is their role – and not ours – that holds the consequence and the challenge.  We just need to do the easy part, which is to enable them by providing the bedrock of financial stability, aligned incentives, and a fair cost of capital that enables the Group to carry out the solemn responsibility of caring for 17,000 vulnerable people.

As H/2 helps Four Seasons conclusively turn the page on a challenging period, we look forward to a new approach to governance, financial stability and a re-energised workforce.  We would like the Group's stakeholders to know that we measure the success of these and other initiatives by their impact on advancing our highest priority for Four Seasons – providing high-quality care to the residents and families we are honoured to serve."

Baroness Margaret Ford, Former Chair of Barchester Healthcare Limited, said:

"The plan for stakeholders put forward today by H/2 Capital Partners provides stability for Four Seasons Health Care, its residents, their families and its employees.  If implemented, it should ensure the long-term sustainability of this important care provider.

The Low Leverage Stakeholder Plan comes as a very constructive step forward and at a crucial juncture for Four Seasons Health Care, strengthening oversight of the Group.  As I have personally observed across our working relationship, H/2 Capital Partners understands the special nature of our social care system and Four Seasons' important place in it.  I am confident the financial stability brought about by H/2's proposed capital commitments, alongside the appointment of senior and experienced care professionals to the Board, give Four Seasons' management team the tools they need to deliver the highest-quality care.

This plan places quality and continuity of care at its heart.  I look forward to working closely with all stakeholders in the coming weeks to put it into action."

Low Leverage Stakeholder Plan: Highlights

• H/2's Investment Helps Four Seasons Begin a New Chapter:  The scale of H/2's financial support reflects its long-term commitment to residents, their families, the Group, its employees, and its broader stakeholders in government and elsewhere.  Even prior to its additional commitment, we believe that the current value of H/2's investment in the Group exceeds that of the Group's legacy shareholders.  
• Low Leverage Stakeholder Plan Significantly Increases Four Seasons' Equity Capital:  In addition to providing new cash equity, the Low Leverage Stakeholder Plan converts to equity all of Four Seasons' Senior Notes.  Investment funds affiliated with H/2 hold the substantial majority of the Senior Notes.  The Low Leverage Stakeholder Plan's debt-for-equity swap represents a substantially larger equity conversion and debt reduction than the High Leverage Sponsor Plan.
• Low Leverage Stakeholder Plan Substantially Reduces Leverage:  The Low Leverage Stakeholder Plan's new cash equity commitment and debt-for-equity conversion result in a significant £247 million reduction in the Group's total debt, as compared to an inadequate £77 million reduction in the High Leverage Sponsor Plan.
• Low Leverage Stakeholder Plan Eliminates "PIK" Debt Risks in High Leverage Sponsor Plan:  The High Leverage Sponsor Plan includes PIK interest accruals on the Group's higher debt levels.  PIK provisions risk even further increases in debt over time.  The Low Leverage Stakeholder Plan eliminates the PIK interest structure included in the High Leverage Sponsor Plan.
• Leverage Gap Further Widens Over Time:  We believe that the High Leverage Sponsor Plan's structure and significantly higher leverage lead to an even larger increase in risk over time.  Overlaying the High Leverage Sponsor Plan with the Group's own operating projections (which it publicly released on February 28, 2017), we estimate that by 2019, Four Seasons' leverage levels under the High Leverage Sponsor Plan would be more than double those under the Low Leverage Stakeholder Plan, using the same operating projections.  (Please note that these figures reflect estimates based on publicly-available information.)
• New Cash Equity for Resident Home Improvement:  The Low Leverage Stakeholder Plan includes £25 million of new cash equity, of which H/2 has proposed to commit 100%, set aside to improve Four Seasons' homes for residents.
• New Cash Equity for Employee Reward Programme:  The Low Leverage Stakeholder Plan includes £15 million of new cash equity, of which H/2 has proposed to commit 100%, set aside to fund a new reward programme for Four Seasons' caring and talented workforce, from management through to its home managers and other employees.
• Low Leverage Stakeholder Plan Grants 10% Direct Equity Interest to Workforce:  To further recognise employees' critical role in any successful social care enterprise, the Low Leverage Stakeholder Plan grants to Four Seasons' management and employees a full 10% equity interest in the Group following implementation of the plan.  Based on preliminary enterprise value estimates in the Low Leverage Stakeholder Plan, this represents £35 million of prospective value.
• High Leverage Sponsor Plan Purports to Contribute Assets That Are Already Pledged:  In the High Leverage Sponsor Plan, Four Seasons purports to contribute the value of assets which, pursuant to certain deeds of accession, already inures for the benefit of the Group.   Four Seasons is separately seeking rectification of those deeds of accession in legal proceedings in the English High Court.
• Low Leverage Stakeholder Plan Lowers Interest Rate and Lengthens Maturity on Remaining Group Debt:  On the Group debt retained by Existing SSN Noteholders (including H/2), the Low Leverage Stakeholder Plan proposes a lower interest rate than the interest rate already offered by the High Leverage Sponsor Plan.  Despite the fact that H/2 currently holds a majority of the Group's outstanding Senior Secured Notes, under the Low Leverage Stakeholder Plan, H/2 proposes that these same Notes will receive a lower interest rate and carry a longer maturity date than under the High Leverage Sponsor Plan.  These changes provide greater financial stability for the Group than under the High Leverage Sponsor Plan.  Furthermore, the Low Leverage Stakeholder Plan eliminates the "PIK" interest included in the High Leverage Sponsor Plan.  H/2 believes that when combined with the other aspects of the High Leverage Sponsor Plan, the "PIK" interest structure increases risks to the Group. 
• Best Practices Governance:  Under the Low Leverage Stakeholder Plan, the new Board of Directors will be comprised of nine members, a majority of which will be independent, with a focus on individuals with healthcare, public policy and operational experience.  Baroness Margaret Ford is expected to serve as the Non-Executive Chair of the Board of Directors.  Baroness Ford has been a member of the House of Lords since June 2006, and was formerly Chair of Barchester Healthcare Limited.  She is currently Chair of STV Group.  The new Board will also appoint critical new oversight committees, such as a Quality of Care Committee to support management in its efforts to deliver the highest quality of care to residents.  We are optimistic that the reconstituted Board of Directors and the management team can together chart a course to enhance operating excellence, care quality and resident satisfaction.
• H/2 Opens Participation in Low Leverage Stakeholder Plan to Existing Stakeholders and Independent Third Parties:  While it proposes to backstop 100% of the new equity funding in the Low Leverage Stakeholder Plan to help ensure the plan's success, H/2 has invited existing stakeholders to participate in the investment of new equity, should they choose.  This includes the Group's existing private equity sponsor.

In addition, H/2 is open to considering proposals from independent third parties unaffiliated with the Group who wish to participate.

In connection with its proposed backstop commitment, H/2 has offered to forego any of the fees that customarily accompany lender backstops and/or commitments per market convention for such transactions.  Backstopping the entire £135 million of new cash equity while seeking no commitment fees from the Group or other stakeholders, H/2 has further proposed what it regards as an extraordinary offer of assistance to the Group's existing private equity sponsor.  Specifically, H/2 proposes to give the private equity sponsor the option of increasing the sponsor's equity ownership in the deleveraged Group that results from the Low Leverage Stakeholder Plan.  Under H/2's proposal, the private equity sponsor may elect to fund up to £45 million of the £135 million in new cash that H/2 would backstop and otherwise commit to the Group.

The Low Leverage Stakeholder Plan also treats minority holders of the Senior Secured Notes and the Senior Notes identically to H/2 (H/2 holds the substantial majority of the Senior Secured Notes and over 75% of the Senior Notes).  In the case of the other Senior Noteholders, as with the Group's existing private equity sponsor, H/2 proposes to offer them the choice, but not the obligation, of participating in the new equity funding (that H/2 proposes to back-stop for no additional consideration).

In all cases, should the private equity sponsor or other Senior Noteholders choose not to fund any additional cash for the benefit of the Group, H/2 has proposed that it backstop and therefore fund 100% of the cash requirement itself.  H/2 believes the fact that it is not seeking any fees, special terms or other consideration for its commitment to backstop the new equity funding is rare under the circumstances, and provides the Group with an increased level of certainty at a lower cost.

• Key Provisions of Low Leverage Stakeholder Plan Form An Integrated Whole:  The terms of the Low Leverage Stakeholder Plan form a carefully considered and integrated whole.  Each of the significant individual elements of the plan is dependent on its other elements.  For example, the equity conversion for the Senior Notes, the amended terms for the Senior Secured Notes, and the preliminary enterprise valuations considered in the Low Leverage Stakeholder Plan – each is inextricable from the Low Leverage Stakeholder Plan's provisions regarding the Group's leverage, governance, equity control and voting, cash reserves for investments in care homes and employee incentives, and a number of other critical elements of the proposal.

High Leverage Sponsor Plan: Risks of Completion and Implementation

For the reasons detailed above, we believe that the Low Leverage Stakeholder Plan carries significantly less ongoing risk to the Four Seasons enterprise than the High Leverage Sponsor Plan.  Moreover, we believe that the Low Leverage Stakeholder Plan also has substantially less completion risk than the High Leverage Sponsor Plan.  Some of the major reasons we believe this to be the case include:

High Leverage Sponsor Plan Likely to Lack Sufficient Creditor Support
The Low Leverage Stakeholder Plan can be implemented on a consensual basis without the need for any administration or insolvency process, while the High Leverage Sponsor Plan is likely to lack sufficient creditor support.  To implement a scheme of arrangement and avoid the risk of a non-consensual outcome, both the Low Leverage Stakeholder Plan and the High Leverage Sponsor Plan require support from creditors representing 75% in value of each of the two classes of creditors (namely, the Senior Secured Notes and the Senior Notes).  H/2 owns a substantial majority of the Senior Secured Notes and over 75% of the Senior Notes.  As such, if H/2 does not support the High Leverage Sponsor Plan, it is unlikely to satisfy the voting thresholds required for scheme approval.  On the other hand, if the Group agrees to propose the Low Leverage Stakeholder Plan to creditors, H/2 believes it has a high likelihood of approval.

High Leverage Sponsor Plan Proposes a Risky Leasehold Estate Restructuring
We believe that the leasehold estate restructuring proposed in the High Leverage Sponsor Plan exposes Four Seasons to risks regarding continuity of care and operational stability.  Under the High Leverage Sponsor Plan, we understand that leasehold operating companies whose landlords have not consented to revised lease terms are proposed to be left behind in a "Transition Group" whose oversight is unclear.

The Low Leverage Stakeholder Plan is not contingent on a restructuring of any leases with the Group's landlords.  While the Low Leverage Stakeholder Plan is not subject to any leasehold estate restructurings, H/2 has substantial in-house expertise in property lease restructurings and modifications that it believes would materially benefit the Four Seasons management team and new Board of Directors in developing and completing lease restructurings.  In this regard, H/2 has spent considerable time independently assessing a restructuring of Four Seasons' property leases.

Low Leverage Stakeholder Plan Retains and Incentivises Four Seasons Management
The Low Leverage Stakeholder Plan is not subject to any changes in Four Seasons' management or employees.  H/2 is excited at the prospect of working together with the Four Seasons team, and looks forward to a long and rewarding collaboration.

Low Leverage Stakeholder Plan Capital Commitment Not Subject to Financing Contingencies
Under the Low Leverage Stakeholder Plan, H/2 is fully prepared to fund the entire £135 million backstop commitment should no other parties elect to participate.  The H/2 investment funds have sufficient unrestricted cash to do so.  H/2 backstop proposal is not subject to any other financing contingencies.

Low Leverage Stakeholder Plan Reflects Extensive Work Done to Date
H/2 has, over a considerable period of time, undertaken significant work to fully understand the nature of the Group's business and its operations.  To this end, H/2 has conducted extensive independent due diligence and has worked with numerous advisers (both financial and operational) to formulate plans that ensure the continuity of care.

Low Leverage Stakeholder Plan: Interest Deferral and Engagement

H/2 has offered to defer the semi-annual interest due to be paid on the Senior Secured Notes and Senior Notes on December 15, 2017.  H/2 is offering a deferral of interest in order to reassure stakeholders and provide time to implement the Low Leverage Stakeholder Plan. 

To facilitate the Group's interest deferral, H/2 has provided the Group with a draft deferral and forbearance agreement running through March 1, 2018.

We have also provided the Group with a simple, one-page extension to the non-disclosure agreement previously executed by both parties in September 2016 (which has since lapsed, but which can be reinstated with a simple extension letter).  We have made clear to the Group that we are prepared to execute the extension letter immediately in order to receive updated due diligence materials and negotiate detailed transaction documentation.

Implementation of the Low Leverage Stakeholder Plan is subject to confirmatory due diligence typical for transactions of this nature (including financial, tax and legal due diligence) and the receipt of any required stakeholder, regulatory and other governmental approvals.  H/2, together with its advisers, stands ready to complete confirmatory due diligence quickly and efficiently.

Low Leverage Stakeholder Plan: Next Steps

We stand ready to immediately work with Four Seasons and its advisers to complete the Low Leverage Stakeholder Plan.  Over multiple years, H/2 has maintained a substantial investment in the Group.  As detailed above, we consider the risks and conditions to implementation of the Low Leverage Stakeholder Plan to be modest and manageable over an abbreviated period, whilst we believe the High Leverage Sponsor Plan carries significantly greater risk of failure.  H/2, as well as its extensive group of professional and individual healthcare advisers, have devoted substantial time and resources to Four Seasons stakeholder communications, business and legal preparations, operating plans and related work.

Under our improved plan for stakeholders, we believe that Four Seasons' residents, families, employees and other important constituents can look forward to a secure future.  To that end, we would like to engage with the Group as soon as possible.  We and our advisors are available to meet with the Group and its advisors at any time and location that is most convenient for the Group.  Given the importance of the matter, we have taken the liberty of clearing our schedules from 8:30 am onward every day this week, so that we can immediately begin work toward implementation.

Stakeholder Enquiries

Stakeholders and other interested parties should contact Matthew Prest (matthew.prest@moelis.com) or Stephen Aulsebrook (stephen.aulsebrook@moelis.com) at Moelis & Company UK LLP regarding the Low Leverage Stakeholder Plan. 

In addition to Moelis, we are advised by Weil, Gotshal & Manages (London) LLP, Ernst & Young LLP, Akin Gump Strauss Hauer & Feld LLP and Blake Morgan LLP.

About H/2 Capital Partners

H/2 Capital Partners is an institutional investment manager that has completed over $40 billion of investments since its inception, including approximately $3.8 billion in healthcare.  H/2 invests on behalf of leading institutional investors, including pension funds, sovereign funds, insurance companies, foundations, and other institutions globally.  H/2 has a track record of working constructively with both private and publicly-listed companies in the U.K. and elsewhere to create financial stability and encourage long-term success for those businesses.

Annex 1
A Superior Proposal for Four Seasons, its Residents and Employees

Notes:

1)      Assumes current debt at the Group as of June 30, 2017 includes £40 million super senior term loan, £350 million Senior Secured Notes, £175 million Senior Notes and £32 million of net debt at brighterkind (CB) Limited.  These amounts are based on Elli Investments Limited financial results for the quarter ended June 30, 2017 (as posted on Four Seasons' Investor Relations website) and the Group announcement dated October 17, 2017.  Assumes proposed debt under the High Leverage Sponsor Plan includes £40 million super senior term loan, £420 million Senior Secured Notes and £60 million Senior Notes.  These amounts are based on the Group announcement dated October 17, 2017.

2)      Assumes Group debt as of June 30, 2017 as described in Note 2 above.  Proposed debt under the Low Leverage Stakeholder Plan is £350 million.

3)      Reflects net debt (debt minus cash), divided by preliminary enterprise value estimates.

Annex 2
Key Terms of the Low Leverage Stakeholder Plan

The key terms of the Low Leverage Stakeholder Plan include:

New Capital Investment

• Certain investment funds affiliated with H/2 have agreed to backstop 100% of £135 million in new cash equity capital to be invested in the Group, of which £25 million will fund resident home improvements and £15 million will fund an employee incentive plan.
• Four Seasons' legacy private equity sponsor will be offered the opportunity to invest up to £45 million of the £135 million in new cash equity received by the Group.  In addition, each holder of the existing Senior Notes (the "Existing SN Noteholders") will have the opportunity to fund its share of the £135 million in new cash equity.  However, H/2 is proposing to backstop the entire £135 million such that the plan's completion will not depend on new equity funds from other holders or the private equity sponsor. 

Corporate Governance

• The reconstituted Board of Directors will consist of nine directors, a majority of which will be independent.  One director will be appointed by Four Seasons' existing private equity sponsor, and one director will be a member of the existing management team.  Two directors will be appointed by Existing SN Noteholders exchanging into equity and funding new cash. 
• We currently expect that the new Board's composition will include greater participation from professionals with experience in the social care and public policy sectors.

Senior Secured Notes

• The holders of the existing Senior Secured Notes (the "Existing SSN Noteholders" and, together with the Existing SN Noteholders, the "Existing Noteholders") will exchange the £350 million Senior Secured Notes for new senior secured notes with a principal amount of £350 million (the "New SSNs").
• The New SSNs will bear a stated coupon of 7.00% per annum, payable semi-annually in cash, and will mature 5.5 years following the implementation of the Low Leverage Stakeholder Plan.
• The New SSNs will have a guarantee and first ranking security package granted by the Group, with first ranking mortgages on all owned facilities.

Equity Ownership

• Existing SN Noteholders will receive a 40% equity interest in the Group, as restructured, following the exchange of their Senior Notes.
• The Existing SN Noteholders will receive the right to purchase up to an additional 39% of the equity by funding their share of the £135 million new cash equity capital to be invested in the Group.  The Low Leverage Stakeholder Plan provides the Group's existing private equity sponsor with the option to increase its equity ownership by funding up to £45 million of the £135 million, if it so chooses.  The up to 39% interest purchased by Existing SN Noteholders will be reduced by any portion of the up to £45 million that the existing private equity sponsor elects to fund. 
• These ownership percentages reflect 10% dilution from the direct equity interest granted by the Low Leverage Stakeholder Plan to the Four Seasons workforce.  The remaining equity interest of 11% will be held by the existing private equity sponsor, subject to its full support of the Low Leverage Stakeholder Plan.

Other Secured Debt

• The existing £40 million super senior term loan will be repaid in full.
• External debt of the brighterkind (CB) group of companies (net debt of £32 million) will be repaid in full.

Cash Reserves

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