Moody's downgrades Meritas Schools, rates loans B3

Moody's Investors Service said it downgraded Meritas Schools Holdings, LLC's corporate family rating to B3 from B2 and probability of default rating to B3-PD from B2-PD and assigned B3 (LGD3, 46%) ratings to its proposed $30 million first-lien senior secured revolving credit facility due 2018 and proposed $215 million first-lien senior secured term loan due 2019. The outlook was changed to stable from negative.

Meritas will primarily use proceeds from the proposed first-lien bank debt to refinance its existing first-lien bank credit facility and second-lien term loan, which are rated Ba3 (LGD2, 25%) and B3 (LGD5, 77%), respectively. The proposed transaction will also be used to pre-fund capital requirements of Leman Manhattan and provide for additional liquidity for Meritas in the form of balance sheet cash.

The agency said the downgrade reflects the fact that the proposed transaction meaningfully increases leverage. Pro forma for the proposed refinancing transaction, Moody's estimates that leverage increases to about 6.5 times for the last 12 months ended March 31.

Notwithstanding these concerns, the financing improves the company's liquidity profile by expanding the revolver to $30 million from $10 million, extending the debt maturity profile and by increasing balance sheet cash by about $15 million, Moody's said.

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