OREANDA-NEWS. Fitch Ratings has assigned a Long-Term Issuer Default Rating of 'B' to Voyage Bidco Limited (Voyage). We affirm and withdraw the rating on Voyage Holding Limited at 'B' as it has been replaced by Voyage Bidco Limited (BidCo) rated 'B' as the highest consolidated entity within the restricted group. Fitch also affirms the senior secured and second lien notes for Voyage BondCo plc at 'BB'/'RR1'/100% and 'CCC+'/'RR6'/8% respectively. The Outlook is Stable.

The rating reflects Voyage's position as the largest independent provider of support to people with learning disabilities in the UK, its focus on high acuity care and its relative resilience to local authorities funding pressure. Factors constraining the rating are its high leverage, high dependence on local authority funding, tightening regulation and rising staff costs.

The ratings do not reflect the announced introduction of a National Living Wage from April 2016. Indeed Britain's biggest care home providers are currently in discussions with the government and local authorities to address the unsustainable funding gap that will result from the increase in wages. The November 2015 British government spending review is expected to address this issue.

KEY RATING DRIVERS

Solid Market Positioning
Voyage's IDR is supported by its positioning 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.

Focus on High Acuity
The ratings also reflect Voyages' focus on high acuity non-discretionary services, which is relatively resistant to the funding cuts of local authorities and the associated trend towards less costly options such as supported living and domiciliary care.

Downstream Challenges
Voyage is constrained by its high dependence on local-authority funding which accounts for almost 82% of revenue. Fitch expects sub-inflation fee uplifts funded by local authorities to remain unchanged over the rating horizon due to budget constraints, leading to stretched margins.

Relatively Weak Credit Metrics
Fitch expects funds from operations (FFO) adjusted net leverage of around 6.5x at financial year ending 31 March 2016 (FY16) pointing towards low headroom under our rating guidance, although we expect this to improve to around 6.2x by FY18. We also expect FFO fixed charge coverage of around 1.8x over the rating horizon, which is slightly below the median of 2.0x for its rating. A significant portion of Voyage's cash flow generation is used to pay interest on the notes and expenses related to maintenance capex.

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 'RR6'/8%.

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. Key Fitch forecast assumptions include the following.

- Group revenue increasing by around 1% year-on-year for FY16-18 driven by stable occupancy rates together with increase in average weekly fee of around 1% each year in the registered homes division, which generated about 76% of Voyage's revenues at FY15.

- Group EBITDA margins declining at 20.3% in FY16 and remaining almost stable thereafter mainly due to an increase in agency costs in FY16.

- Capex of around 6% of sales. Capex is essentially maintenance capex which is necessary for the reputation and the occupancy rate of the business.
- Continued positive free cash flow generation of around 3.5% 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 GBP 20m 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;
- Free cash flow margin below 3% on a sustained basis.

LIQUIDITY

Liquidity is satisfactory with no debt maturity until 2018. In 2014, Voyage increased headroom under its revolving credit facility to GBP45m from GBP30m maturing in August 2018. As per the end of June 2015, the company had a cash balance available of GBP 12m together with GBP45m of fully undrawn revolving credit.

Voyage's GBP222m senior secured notes mature in August 2018. Its GBP50m second lien notes mature in February 2019.

FULL LIST OF RATING ACTIONS

Voyage Bidco Limited
-- Long Term IDR: Assigned new rating of 'B';

Voyage Holding Limited
-- Long Term IDR: Affirmed and Withdrawn IDR of 'B';

Voyage Care BondCo PLC
-- Senior secured notes: Affirmed at 'BB'/'RR1'/100%;
-- Second lien notes: Affirmed at 'CCC+'/'RR6'/8%.