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Fitch Affirms Voyage at 'B'; Outlook Stable
October 3, 2016 / 3:16 PM / a year ago

Fitch Affirms Voyage at 'B'; Outlook Stable

(The following statement was released by the rating agency) LONDON, October 03 (Fitch) Fitch Ratings has affirmed Voyage Bidco Limited's (Voyage) Long-Term Issuer Default Rating at 'B' with a Stable Outlook. We have also affirmed Voyage BondCo plc's senior secured notes at 'BB'/'RR1'/100% and upgraded the second lien notes to 'B-'/'RR5'/23% from 'CCC+'/'RR6'/8%. The affirmation reflects Voyage's position as the UK's largest independent provider of support to people with learning disabilities and its focus on high acuity care, which provides some resilience to government spending pressures. However, the rating remains constrained by the group's high leverage, pressures on profitability due to rising staff costs and high dependence on local authority funding. The Stable Outlook reflects our expectation that Voyage will operate with reasonably consistent debt protection ratios inside our formulated rating sensitivities. KEY RATING DRIVERS Solid Market Positioning Voyage's IDR is 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 nine 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. Defensive Business Model Voyage covers the full spectrum of social care services for people with learning disabilities in either a registered care home, a supported living setting or as outreach services. The diversification of Voyage's service lines provides some resilience to the on-going tightening in registered care homes eligibility criteria set by local authorities pushing towards less costly services options like supported living and domiciliary care. Nevertheless, we consider the ratings constrained by Voyage's high dependence on local authorities' funding (approximately 90% of its funding). Cost Inflation, Margin Pressure We believe Voyage's profitability will remain under pressure following the introduction of the National Living Wage (NLW), which came into effect in April 2016. We project a substantial increase in payroll costs (roughly 50% of Voyage staff are receiving the NLW) in addition to the effects of adjusting the wage hierarchy across the organisation. The 'social care' levy introduced by the UK treasury to increase funding for care has been adopted by the majority of local authorities and has led to a moderate increase in fee rates during 2016. However, we expect these to be insufficient to fully restore profitability in the near term. We estimate EBITDAR margin to gradually erode to just below 20% by FY18 (ending in March) from 23% in FY15, which remains ahead of peers with lower acuity. Credit Metrics Weak Based on conservative projections, Fitch expects funds from operations (FFO) adjusted net leverage to remain around 6.x and FFO fixed charge coverage just below 2.0x. We expect annual free cash flow (FCF) margins of between 3.5%-4.5%, which places the group's financial risk profile at the 'B' rating. We forecast that a significant proportion of Voyage's cash flow generation will be used to pay interest on the notes and expenses related to maintenance capex. Significant Owned Asset Base Voyage's rating is supported by its significant asset base through its ownership of 70% of its properties. These were valued in May 2014 at GBP410.4m (freehold and long leasehold assets). Voyage's strong portfolio of freehold assets properties gives the company greater operating flexibility thanks to lower rental costs. Recovery Prospects In its recovery analysis, Fitch adopted the liquidation value approach as the resultant enterprise value is higher than the going concern enterprise value, primarily derived from the group's freehold and long leasehold properties. Fitch believes that a 30% discount on the assets' latest market valuation dated May 2014 is fair in a distress case. The recovery expectation for the senior secured notes is high at 'RR1'/100%, while the recovery expectation on the second lien notes is 'RR5'/23%. KEY ASSUMPTIONS Fitch's expectations are based on the agency's internally produced, conservative rating case forecasts. They do not represent the forecasts of rated issuers individually or in aggregate. Fitch's key assumptions for the rating case to 2018 (at which point the current capital structure matures) include: -Moderate increase in sales of 2% on average driven by stable occupancy rates and moderate increases in average weekly fee rates. -EBITDAR margins softening to just below 20% mainly due to an increase in staffing costs -Capex around 5% of sales. Capex is essentially maintenance capex, which is compulsory for the reputation and the occupancy rate of the business. -Continued positive FCF generation of around 3.5%-4.5% of sales. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to positive rating action include: - FFO adjusted leverage of 6.0x (net 5.0x) or below on a sustained basis. - FFO fixed charge coverage above 2.5x. - Sustained FCF generation of GBP20m or more translating into FCF margin in the high single digits as percentage of sales. Negative: Future developments that may, individually or collectively, lead to negative rating action include: - FFO adjusted leverage above 7.0x (net 6.5x); - FFO fixed charge coverage below 1.5x; - FCF margin below 3% on a sustained basis. LIQUIDITY Fitch considers Voyage's liquidity satisfactory with no debt maturity until August 2018. At the end of June 2016, the company also had cash balances available of GBP21.9m in addition to its GBP37.5m committed undrawn RCF. Voyage GBP222m senior secured notes mature in August 2018. Its GBP50m second lien notes mature in February 2019. We believe that Voyage will aim for a timely refinancing of the capital structure. Contact: Principal Analyst Victoria Ghannage Associate Director +44 20 3530 1190 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 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Summary of Financial Statement Adjustments - Fitch adjusts financial leverage for lease obligation capitalising these with a multiple of 8x. We also consider GBP2m of cash as restricted, absorbed by the group's working capital. Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1012552 Solicitation Status here Endorsement Policy here ail=31 ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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