OREANDA-NEWS. S&P Global Ratings assigned its 'B+' corporate credit rating to Quality Care Properties Inc. The outlook is stable.

At the same time, we assigned a 'BB' issue-level rating and '1' recovery rating to Quality Care Properties' $1 billion first-lien term loan and $100 million revolver. The '1' recovery rating indicates our expectation for a very high recovery (90% to 100%) for loanholders in the event of a payment default. We assigned a 'BB-' issue-level rating and '2' recovery rating to Quality Care Properties $750 million second-lien notes. The '2' recovery rating indicates our expectation for a substantial recovery (70% to 90%, higher end of the range) for bond-holders in the event of a payment default. The borrowers of the credit facility will be SNF West Sub-REIT, SNF Central Sub-REIT, SNF East Sub-REIT, and AL Sub-REIT.

We expect the company to use proceeds from the offering to fund the spin-off transaction from HCP Inc. (BBB/Stable/--) through a tax-efficient distribution to HCP shareholders in the third quarter of 2016. Post spin-off, Quality Care Properties will be an independent publicly-traded company that owns, manages and acquires health care-related real estate properties.

"The ratings on Quality Care Properties incorporate its significant market position in the SNF industry that is saddled with reimbursement risk and a concentrated tenant base; however, long-term triple-net leases provide some stability to cash flows, and we expect the company to operate with relatively conservative credit protection measures," said credit analyst Sarah Sherman. "We expect Quality Care Properties to use excess cash flow to reduce debt given the company's low prospective dividend payout policy that could improve metrics beyond our base-case scenario. However, we believe the integral issue going forward will be Quality Care Properties' ability to achieve sustainable rent coverage at HCR (B-/Developing/--), which caused inconsistent cash flow generation for HCP in the past."

The stable outlook reflects our expectation for Quality Care Properties to continue collecting rent from HCR, leading to adequate cash flow generation. While HCR remains pressured by Medicare Advantage and the uncertainty surrounding the Department of Justice investigation, we believe Quality Care Properties will be able to maintain or improve credit protection measures over the next year following an expected rent renegotiation, alleviating weak tenant coverage levels.

We would consider lowering the ratings on the company if additional rent renegotiations appear likely such that Quality Care Properties exhibits volatility in its cash flows, causing us to reevaluate our business risk assessment. Additionally, we could lower the rating if leverage increases above 7.5x or fixed-charge coverage drops below 1.7x. A lower rating is also possible if liquidity becomes constrained as a result of covenant cushion declining below 15% because of lower NOI generation, likely driven by additional rent concessions beyond our forecast.

We do not believe an upgrade is likely over the next 12 months, given Quality Care Properties' tenant concentration. Longer term, we would consider raising the rating by one notch if Quality Care Properties is able to diversify its tenant base. Additionally, we would consider an upgrade if leverage were to decline below 4.5x and if fixed-charge coverage improves above 3.1x for a sustained period.