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April 16 (The following statement was released by the rating agency)
Fitch Ratings has affirmed Voyage Holding Limited's (Voyage) Long-term Issuer Default Rating (IDR) at 'B' with a Stable Outlook. A full list of rating actions is at the end of this rating action commentary. The ratings are supported by Voyage's leading market positions as an independent provider of care to people with learning disabilities (PLD) in the UK as well as its focus on the high acuity segments of the market. The ratings also incorporate the current pressure on EBITDA margins derived from limited fee inflation and increased costs, which are likely to weigh on the company's FY14 leverage. While we expect FY15 (ending March 2015) profitability to recover thanks to recent bolt-on acquisitions, normalisation of staffing costs and general cost control initiatives, signs of further pressure on profitability would lead to negative rating action.
KEY RATING DRIVERS
Solid Market Positioning In Small Market
Voyage's IDR is supported by its positioning as the largest independent provider of support to PLD in the UK with FY13 sales of GBP181m and EBITDA of GBP43.7m. This is a fragmented market, which is growing due to the ageing population and the improvement in diagnostics. Through its focus on the most severe end of the acuity spectrum, we believe that Voyage is somewhat insulated from substitution and from the substantial ongoing efforts of local authorities to cut funding cuts.
Geographical and Business Diversification
Voyage has a wide geographic presence across the UK with no single local authority purchaser accounting for more than 4% of revenues. In addition to its core registered care homes division (approximately 80% of FY13 sales), Voyage covers the full spectrum of social care services for PLD, including supported living settings as well as "outreach" and day care activities. This business diversification provides a hedge against government policy changes.
High Dependence on Local Authority Funding
The ratings are constrained by Voyage's high dependence on local authorities' funding (approximately 83% total revenues). In the context of the current reduction in UK local authorities' budgets, the average level of fees funded by local authorities is expected to remain under pressure for FY14-15, although we factor some modest fee inflation thereafter.
Weak Credit Metrics
The rating is also constrained by Voyage's relatively weak credit metrics for its rating and by their likely deterioration in FY14. Fitch projects lease-adjusted funds from operations (FFO) net leverage to reach 7.0x in FY14 (FY13: 6.6x). Thanks to management's actions to reduce staff, agency and other costs towards 75% of sales from FY14's peak of 77%, we consider that net leverage has scope to gradually reduce below 6.0x by FY16. Similarly, we expect a recovery in FFO fixed charge cover towards 2.0x by FY16, more in line with the current rating (FY14: approximately 1.7x). The inability to improve profitability as expected by Fitch would result in a revision of the Outlook to Negative in the absence of fee increases or other mitigating factors.
Modest FCF Generation
Fitch expects Voyage's free cash flow (FCF) to remain positive, albeit relatively low compared with higher-rated healthcare peers, at an expected GBP11m-GBP15m p.a. from FY14, significantly affected by the high interest payments. FCF for FY14 was depressed by increased operating costs, assumed to be one-offs associated with acquisitions and increased inspection in the sector. We assume capex in maintenance and general refurbishments of homes will remain moderate at around 4% of sales from FY15 onwards.
Solid Recovery Prospects for Senior Secured Creditors
The 'BB'/'RR1' rating for the senior secured notes reflects the significant asset base through Voyage's ownership (freehold and long leasehold) of 76% of properties by number of beds following the liquidation approach which results in a distressed enterprise value which is higher than the going concern method. Fitch believes that a 30% discount on the latest available market value of the assets is deemed fair in a distress case. However there is limited recovery expectation for the second lien notes hence its affirmation at 'CCC+'/'RR6'.
Positive: Future developments that could lead to positive rating actions include:
- FFO adjusted net leverage of 5.0x or below
- FFO adjusted leverage below 6.0x with FFO fixed charge coverage above 2.5x
- Sustained annual FCF generation of GBP20m or more translating into an FCF
margin in the high single digits as percentage of sales
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage remaining above 6.5x after FY14
- FFO adjusted leverage remaining above 7.0x, with FFO fixed charge coverage
below 1.5x on a permanent basis
- FCF margin below 3% for more than one year
- Signs that profitability for Voyage and the UK care services industry is deteriorating
LIQUIDITY AND DEBT STRUCTURE
Fitch anticipates that Voyage's liquidity will remain adequate with cash on balance sheet of GBP17m in December 2013 driven by positive free cash flows, and a fully undrawn GBP30m RCF.
Leveraged Capital Structure; No Debt Maturities before 2018 Voyage's current debt includes GBP222m of senior secured notes maturing in August 2018, GBP50m of second lien notes maturing in February 2019 and a revolving credit facility of GBP30m maturing in February 2018. While there is no debt amortisation pressure in the foreseeable future, we consider that the refinancing risk by FY17 will be moderate and consistent with a 'B' IDR.
FULL LIST OF RATING ACTIONS
Voyage Holding Limited
- Long-term IDR: affirmed at 'B'; Outlook Stable
Voyage Care BondCo PLC
- Senior Secured Notes: affirmed at 'BB'/'RR1'
- Second Lien Notes: affirmed at 'CCC+'/'RR6'