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Fitch Downgrades Voyage to 'B-'; Stable Outlook
March 9, 2017 / 4:50 PM / 9 months ago

Fitch Downgrades Voyage to 'B-'; Stable Outlook

(The following statement was released by the rating agency) LONDON, March 09 (Fitch) Fitch Ratings has downgraded Voyage Bidco Limited's (Voyage) Long-Term Issuer Default Rating to 'B-' from 'B', the Outlook is Stable. Fitch has also downgraded Voyage Care BondCo plc's senior secured notes to 'BB-'/'RR1'/100% from 'BB'/'RR1'/100% and the second lien notes to 'CCC+'/'RR5'/24% from 'B-'/'RR5'/23%. The downgrade of the IDR to 'B-' reflects the growing pressure on margins and free cash flow (FCF) generation due to Voyage's strategy to expand substantially the high-growth yet lower-margin community-based care services business together with high leverage measured as funds from operations (FFO) adjusted gross leverage is expected to reach above 7.5x in August 2017, one year before the reimbursement of the GBP222 million senior secured notes. 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 considers such a high level of financial risks more consistent with a 'B-' profile relative to sector peers. The Stable Outlook reflects Fitch's expectation of high, yet still manageable refinancing risks over the next 12 to 18 months horizon. This balances the group's high leverage, pressures on profitability due to rising staff costs, high dependence on local-authority funding, and the shift in the underlying business model towards assisted living mitigated by a strong asset base. KEY RATING DRIVERS Pressure on Credit Metrics: Fitch expects FFO adjusted net leverage of around 7.3x for the financial year to March 2017 (FY17), and then to peak at above 7.5x in FY18, one year before the reimbursement of the GBP222 million senior secured notes. This is based on Fitch's conservative projections. The anticipated increase in leverage at a time of increasing refinancing risks drives our downgrade to 'B-'. Together with FFO fixed charge coverage of above 1.5x, weakened credit metrics support a credit profile more consistent with a 'B-' rating. Fitch also expects break-even FCF generation by March 2018, a reflection of weakening profit margins, and a significant proportion of Voyage's cash flow which will be used to pay interest on the notes and expenses related to maintenance capex. Specialist Services, Diversification: Voyage's business risk profile is supported by its 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 a degree of resilience to the tightening in registered care homes eligibility criteria set by local authorities as they move towards less costly options like supported living and domiciliary care. Voyage's strategy is to expand substantially its 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 to smaller, less diversified players. Solid Market Positioning: Voyage's IDR remains supported by its position as the largest independent provider of support to people with learning disabilities in the UK. Occupancy levels tend to be high at over 90%, with average lengths of stay of around eight years due to the high acuity, non-discretionary nature of the services it provides. The UK learning disabilities market is a highly fragmented market, dominated by independent providers. Dependence on Local-Authority Funding: Voyage's ratings are constrained by its high dependence on local government, which accounts for around 90% of its funding. In the context of 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 revenues ring-fenced for social care) by the majority of local authorities has resulted in an increase in average fees, although not one sufficient to compensate fully the existing underfunding of care which has been exacerbated by the introduction of the National Living Wage. As a result, Fitch expects Voyage EBITDA's 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 anticipated wage inflation and a potentially widening labour shortage as the 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 and recovery prospects are underpinned by its 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 thanks to lower rental costs, and underpins our superior recovery expectations for the secured notes to which we have assigned a 'BB-' instrument rating (reflecting a three-notch uplift from the IDR). Fitch bases its recovery analysis on the underlying asset values, applying a liquidation approach. KEY ASSUMPTIONS Key Fitch forecast assumptions are listed below. - Increase in sales by 3% in FY17, 6% in FY18 and around 12% thereafter, mainly driven by a significant growth of community-based care services through tender wins together with an increase in local-authority average weekly fee funding the registered care division by 2%-3 % on average; - EBITDA margins declining from 20.3% in 2016 to 14.1% in 2020 mainly due to a shift in Voyage's business mix with expansion of the Community Base Care Services division which is expected to represent 45% of Voyage Care revenues in 2020 compared with 25% in 2016. In addition, there will be an increase in payroll costs as the result of the introduction of the National Living Wage in April 2016, which is not adequately compensated by the local authorities' increase in fees, especially for the Community Base Care Services division. - Capex around 6% of sales in FY17 and FY18, 4% of sales thereafter. Capex is essentially maintenance capex which is compulsory for the reputation and the occupancy rate of the business. - FCF generation neutral during FY17 and FY18, positive around 2% of sales on average thereafter. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Further pressure on the UK social care business model, including Voyage's inability to reposition its business model towards growth of the assisted living sector, leading to: -FFO adjusted leverage trending above 8.5x on a sustained basis; -FFO fixed charge coverage sustainably below 1.5x; -negative FCF generation and inability to refinance its capital structure 12 months ahead of maturity. Future Developments That May, Individually or Collectively, Lead to Positive Rating Action -Improving medium-term visibility around the sustainability of the UK social care business model, resulting in greater scale (EBITDA above GBP50 million) and/or improving profitability and cash generation along with: -FFO adjusted leverage of 6.5x or below on a sustained basis; -FFO fixed charge coverage above 2.0x; -sustained FCF generation translating into FCF margin of at least low -single digits as a percentage of sales. LIQUIDITY Fitch considers Voyage's liquidity satisfactory with cash on balance sheet of GBP21 million at the end of December 2016 together with committed undrawn RCF of GBP 37.5 million. Voyage GBP222 million senior secured notes mature in August 2018. Its GBP50 million second lien matures in February 2019. 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 E145GN Committee Chairperson Edward Eyerman Managing Director +44 20 3530 1359 Summary of Financial Statement Adjustments - Fitch adjusts financial leverage for annual lease obligations capitalising these with a multiple of 8x. We also consider GBP2 million of cash as restricted, absorbed by the group's working capital needs. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: 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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