Jan 14 - Fitch Ratings has assigned Voyage Holding Limited (Voyage) a Long-term Issuer Default Rating (IDR) of ‘B’. The Outlook is Negative.
The Negative Outlook reflects the significant refinancing risk within 18 months, as 100% of Voyage’s current debt matures in April 2014. Should refinancing go ahead with the structure outlined to us, which comprises an issue of GBP210m senior secured notes, GBP62m junior notes and a GBP30m revolving credit facility, the Outlook will likely be revised to Stable.
Fitch has also assigned an expected rating of ‘BB(EXP)'/‘RR1’ to the company’s GBP210m senior secured notes and a ‘CCC+(EXP)’ to the GBP62m second lien. The ‘BB(EXP)’ 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. These were valued in November 2012 at GBP372m by an independent party. In its recovery analysis, Fitch adopted the liquidation value of the company, primarily consisting of its freehold and long-leasehold properties, as the resultant enterprise value is higher than the going concern enterprise value. Fitch believes that a 30% discount on the current market value of the assets is deemed fair in a distress case.
Solid Market Positioning In Small Market:
With sales of GBP142m for the year ending in March 2012 (FY12) and EBITDA of GBP37m, Voyage is a small player in the UK social care market. However, it is the number one market player in the fragmented UK market offering support for people with learning disabilities. This market is growing, driven by the ageing population and the improvement in diagnostics. Through its focus on the higher end of the acuity spectrum, the company is somewhat protected from substitution and from substantial funding cuts from local authorities.
Geographical and Business Diversification:
Voyage has solid geographical diversification in the UK with no single local authority purchaser accounting for more than 3.8% of revenues for the year ended 31 March 2012. In addition to its core registered care homes division (approximately 82% of Unit EBITDA-EBITDA before overhead expenses - for the 12 months ended September FY12), Voyage covers the full spectrum of social care services for people with learning disabilities, 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% of FY12 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 in the coming years.
Relatively Weak Credit Metrics:
The rating is also constrained by Voyage’s relatively weak credit metrics. Based on its conservative projections, Fitch expects post refinancing lease-adjusted funds from operations (FFO) net leverage of 6.1x at end March 2013, reducing towards 5.6x at end March 2015 and FFO fixed charge cover remaining around 1.6x over the same period. Free cash flow (FCF) is also expected to be relatively low compared with higher rated healthcare peers, at an expected GBP11m p.a., significantly affected by the interest payments.
Fitch has not classified as debt the GBP261m (at end of March 2012) shareholder loan issued at Voyage Mezzco Ltd and has therefore excluded it from leverage and coverage ratios. The proposed features of this instrument match Fitch’s perception of an-equity like instrument (see “Treatment of Junior Corporate Debt in Europe”, dated 8 April 2011 at www.fitchratings.com).
Modest FCF Generation:
Voyage operates in a fragmented and growing industry and its modest FCF generation offers limited headroom to fund any development capex or acquisitions with internally generated cash flow. This risk is mitigated by the company’s ability to access equity funding for acquisitions from its shareholders, restrictions to debt-funded acquisitions that the documentation of the new capital structure are likely to impose and management’s intention to focus primarily on organic growth.
Positive: Future developments that could lead to positive rating actions include:
- Sustained annual FCF generation of GBP20m or more
- FFO adjusted net leverage of 5x or below
- FFO adjusted leverage below 6x with FFO fixed charge coverage above 2.5x
Negative: Future developments that could lead to negative rating action include:
- FFO adjusted net leverage above 6.5x
- FFO adjusted leverage above 7x, with FFO fixed charge coverage below 1.2x on a permanent basis and FCF margin below 3%
Fitch may have provided another permissible service to the rated entity or its related third parties. Details of this service can be found on Fitch’s website in the EU regulatory affairs page.