Kinder-Care Negotiating To Restructure Large Debt

By Deborah L. Cohen — January 30, 1991 4 min read
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Unable to pay off substantial debts promptly, Kinder-Care Learning Centers Inc., the nation’s largest chain of child-care centers, is negotiating with its creditors to extend repayment over a longer period of time.

The oldest of the national child-care chains, Kinder-Care was founded in 1969 and now operates 1,260 centers. It expanded rapidly through the 1980’s but has begun to rein in new growth in recent months.

While financial analysts and others said last week that Kinder-Care’s financial problems do not signal broader trouble in the child-care business, they noted that many larger for-profit providers have slowed their pace of expansion in the past year.

According to data published in the January/February issue of Child Care Information Exchange, a Redmond, Wash.-based magazine, the annual growth rate for the nation’s 50 largest child-care organizations fell to less than 2 percent last year, down from 8 percent to 10 percent in the three preceeding years.

Kinder-Care, which has maintained that its operations are healthy and that its services and staff have not been scaled back, announced this month that it could not pay a $63-million debt due bondholders. The firm also held off paying a $3-million prin4cipal payment owed banks while it negotiated to restructure its total bank debt of $258 million.

Sharon J. Rives, the firm’s assistant treasurer and director of investor relations, said Kinder-Care is working with banks and bondholders to extend repayment of its debts over three years.

Officials are attempting to raise the funds by selling properties it owns and leasing them back. The firm owns about a third of the buildings that house its centers, but sales have been slow as a result of the sluggish real-estate market, Ms. Rives said.

Analysts within and outside the company say Kinder-Care incurred its debts largely as a result of overambitious expansion and diversification by its former parent company, Kinder-Care Inc.

Using controversial junk-bond financing techniques to raise capital, Kinder-Care Inc. acquired a string of businesses unrelated to child care, ranging from savings-and-loan associations to a shoe-store chain.

It was management’s “diversification binge” that “burdened the company with so much debt,” said Charles Finnie, a research analyst for the Baltimore-based investment firm Alex. Brown & Sons.

“The deals cost Kinder-Care millions of dollars and distracted it from what it was supposed to be doing,” said Roger Neugebauer, editor of the Child Care Information Exchange.

In 1988, Kinder-Care Learning Centers Inc. was spun off as a separate entity focused on child care, while Kinder-Care Inc. retained its other holdings under a new name, Enstar Group Inc.

Despite the debt it inherited, the child-care outfit’s operations are thriving and services have not suffered, company officials maintain.

“This is not a red flag for the world to be concerned about child care,” Ms. Rives said.

While Kinder-Care closed 45 mostly smaller centers last year, it also added 45 new centers, she said. The company had opened 79 new centers in 1988 and 59 in 1989. While scaling back on expansion and targeting “quality growth,” the firm is still pursuing new centers, Ms. Rives said, particularly among businesses and hospitals that can provide space.

“We are in negotiations with a number of investors who want to build centers for us,” she noted.

Other child-care providers and exel20lperts support the view that Kinder-Care’s management-related financial hurdles do not signal broader trouble in the child-care business.

“Nothing’s changed about the demographics,” Mr. Neugebauer said. “It is clear that for the next five years, there will continue to be a strong demand for child care.”

Such experts note, however, that many large providers are slowing expansion in the face of an uncertain economy, oversaturation of the market, and competition from public-school child-care programs.

Despite increased demand by working parents and a shortage of affordable care for poor families, the for-profit market has become glutted in some areas because providers have added more and more centers aimed at the same clients, observers say.

“Everybody is going after the same middle- and upper-class market where people can afford to pay,” Jack L. Brozman, president of La Petite Academy Inc., the second-largest4child-care chain. Although it has consistently maintained low debt and high equity, the company--which runs 750 centers--has slowed growth in recent years from 70 to 80 new centers a year to 30 to 40.

Times have changed from when the public assumed one could “open up a child-care center and children would fall into it,” Mr. Brozman said.

Besides oversaturation, the growing number of school-based programs has also hurt for-profits, particularly when they subsidize care for middle- and upper-class parents, he said.

While Kinder-Care officials said last week that public schools have not cut into their business, the vast majority of child-care owners surveyed for the Child Care Information Exchange cited public-school competition as their number-one threat.

Providers also cite recession-related concerns, including the “drying up” of financing channels and the fear of losing children whose parents are laid off, Mr. Neugebauer noted.

But an increase in two-wage earning couples could help offset that, and the slowdown in new centers will likely reverse itself “as demand catches up” with supply, he said.

A version of this article appeared in the January 30, 1991 edition of Education Week as Kinder-Care Negotiating To Restructure Large Debt


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