December 18, 2017 / 11:55 AM / a year ago

Fitch Affirms Voyage at 'B-'/Stable; Withdraws Ratings

(The following statement was released by the rating agency) LONDON, December 18 (Fitch) Fitch Ratings has affirmed Voyage Bidco Limited's (Voyage) Long-Term Issuer Default Rating (IDR) at 'B-' with Stable Outlook. Fitch has also affirmed Voyage Care BondCo plc's senior secured notes at 'BB-'/'RR1' and second lien notes at 'B-'/'RR4'. Concurrently, Fitch has also withdrawn Voyage's IDR and instrument ratings for commercial reasons. Fitch will no longer provide ratings or analytical coverage of Voyage. The ratings reflect growing pressure on margins and free cash flow (FCF) generation due to rising staff costs, high dependence on local-authority funding and Voyage's strategy to expand substantially the high-growth yet lower-margin community-based care services business. The ratings are also restricted by high funds from operations (FFO) adjusted gross leverage, which is expected to peak at 7.8x by financial year ending 31 March 2018 following its refinancing in April 2017. We acknowledge Voyage's position as the UK's largest independent provider of support to people with learning disabilities and focus on high acuity care, which provides some resilience to government spending pressures. However, Fitch views Voyage's high financial risks as being more consistent with a 'B-' profile relative to sector peers. KEY RATING DRIVERS Pressure on Credit Metrics: Fitch expects FFO adjusted gross leverage to peak at 7.8x in FY18 with only gradual and modest deleveraging thereafter based on the agency's conservative projections. The expected high leverage and weak FCF generation, together with FFO fixed charge cover of just above 1.5x, underpin the IDR at 'B-'. However, we expect slightly better financial flexibility by way of lower interest costs leading to improved FCF generation and FFO fixed charge cover trending towards 2.0x over the next two to three years. Diversified Services Support Credit Profile: Voyage's business risk profile is supported by the company's diversified service offering covering the full spectrum of social care needs for people with learning disabilities in either a registered care home, a supported living setting or as outreach services. Voyage's service line diversification provides resilience to the tightening in registered care homes eligibility criteria set by local authorities as they move towards less costly options such as supported living and domiciliary care. Meaningful Execution Risk: Voyage's strategy is to expand substantially the company's community-based care services business, which bears some execution risks in our view. However, Fitch sees Voyage's ability to offer the full service spectrum to local authorities as a key competitive advantage compared with smaller, less diversified players. Dependence on Local-Authority Funding: Voyage's ratings are constrained by high dependence on local government, which accounts for over 95% of the company's funding. Due to the current reduction in UK local-authority budgets, Fitch expects the average level of fees paid by them to remain under pressure. The implementation of the council tax precept (an option to increase council tax with revenue ring-fenced for social care) by the majority of local authorities has resulted in an increase in average fees, although not sufficient to fully compensate the existing under-funding of care, which has been exacerbated by the introduction of the National Living Wage. As a result, Fitch expects Voyage's EBITDA margin to remain under pressure. Volatile Outlook for UK Social Care: The UK social care market will remain difficult, entering a period of short-term volatility, characterised by continued growth in demand, further expected wage inflation and a potentially widening labour shortage as a result of the focus on limiting immigration. Fitch is sceptical about the current political will and ability to address the long-term funding issues given the current political priorities relating to Brexit and the uncertainty it presents to the long-term planning of public finances. In Fitch's opinion, this will remove some of the visibility for the sector and increase short-term volatility, which could delay any further consolidation in the short term. Significant Asset Base: Voyage's instrument ratings and recovery prospects are underpinned by the company's ownership of 90% of its registered properties. Valued at GBP360 million in November 2016 (freehold and long leasehold assets), Voyage's strong portfolio of freehold assets properties gives the company greater operating flexibility due to lower rental costs. This underpins our superior recovery expectations for the secured notes, which are reflected in the instrument rating being three notches above the IDR. Fitch bases its recovery analysis on the company's underlying asset values, by applying a liquidation approach. DERIVATION SUMMARY Fitch has observed significantly pressures on ratings in the UK leveraged care home sector that has been affected by a reduction of local authorities' fee rates in real terms, with pressures on profitability exacerbated by increasing costs as a result of the increase in the National Living Wage from April 2016. This has led to impaired profitability across the sector as cost inflation could not be passed on to payers, increasingly threatening the underlying business model of operators and making leveraged capital structures increasingly unsustainable. However, immediate funding pressures have eased as local authorities are now able to raise the social care council tax precept, which - as it is applied cumulatively over years - has alleviated imminent funding shortages. During late 2016 the sector saw for the first time funding increases, predominantly in areas of most critical needs such as elderly services. KEY ASSUMPTIONS Fitch's Key Assumptions within Our Rating Case for the Issuer -Increase in sales by 4% in FY18 and around 12% thereafter, mainly driven by a significant growth of community-based care services including the Focus Healthcare acquisition, together with an increase in local-authority average weekly fee funding the registered care division. -EBITDA margins declining to 14.5% in FY21 from 18.2% in FY17, mainly due to a shift in Voyage's business mix with expansion of the low-margin Community Base Care Services division, which is expected to represent 45% of Voyage Care revenue in 2020. In addition, the increasing payroll costs as a result of the increasing National Living Wage is expected to continue putting pressure on profitability as it is not adequately compensated by the local authorities' increase in fees, especially for the Community Base Care Services division. -Capex around 5% of sales in FY18, around 4% of sales thereafter. Capex is mainly for maintenance, which is compulsory for the reputation and the occupancy rate of the business. -FCF generation positive, albeit thin, at 2-4% of sales over the next four years. -No dividends paid. RATING SENSITIVITIES Rating sensitivities are no longer relevant given today's rating withdrawal. LIQUIDITY Satisfactory Liquidity: Fitch views Voyage's liquidity as satisfactory with cash-on-balance sheet of GBP16.4 million at end-September 2017, and an undrawn revolving credit facility of GBP28 million, in the absence of short-term financial liability. Contact: Principal Analyst Louise Liu Analyst +44 20 3530 1660 Supervisory Analyst Frank Orthbandt Director +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: Summary of Financial Statement Adjustments - Fitch adjusts financial leverage for annual lease obligations by capitalising these with a multiple of 8x. We also treat GBP2 million of cash as restricted, absorbed by the group's working capital needs. Additional information is available on For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. 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