Rating agency timing was once again being questioned with the Feb. 21 downgrade by Fitch Ratings of Welcome Break Finance PLC and RoadChef Finance.

The Welcome Break Finance PLC downgrades were as follows: Class A1 to triple-B-plus (from A); Class A2 to triple-B-plus (from A); Class A3 to triple-B-plus (from A); Class B to double B (from BBB). The RoadChef downgrades affected the Class A1 and A2 notes, which were downgraded to triple-B from single-A, and the Class B notes, which were downgraded to double-B from triple-B.

As Robert Paterson, vice president at Morgan Stanley, explained: "It's difficult to understand Fitch's timing in downgrading the deals now. When Fitch placed the bonds on negative watch in July last year, there was already an awareness at the time of the amount of leverage and coverage ratio in the two transactions - and which way these would go."

The two deals had benefited from outside injections of fresh cash. RoadChef obtained an equity support from its existing equity investors, while Investcorp (the owner of Welcome Break) injected a GBP5 million subordinated loan to support its DSCR, as Paterson explained: "The fact that outside support was required makes the downgrades easier to understand."

Paterson adds: "Our view is that there is no material new information, and therefore it's strange that they did not act previously. We believe that a reason could be that Fitch's view of the MSA sector has changed." In this respect it seems that the rating agency is catching up with the market's view. "The debt was trading at the levels of the downgraded ratings for some time. The single A's were trading considerably wider than other single-A paper and therefore this is no real shock to the market," Paterson said.

Nevertheless, the downgrade has resulted in the deals widening out by around 100 basis points, which Paterson attributes to the timing of the downgrade. The market now awaits Standard & Poor's decision. S&P placed both the single-A and triple-B notes of RoadChef on outlook negative during the summer.

As Paterson explains, "The market is now waiting to see what S&P will do, as well as the investor reaction; the debt is now finding the new level at which to trade." In the press release, the rating agency claimed that the downgrades were also a result of low growth expectations in the U.K. Motorway Service area sector, as well as the threat of economic recession.

According to Chris Hillard, at Fitch: "Following a meeting with both companies' management teams and ongoing review of their capital expenditure programs, the growth in their EBITDA and free-cashflow has not been what was originally expected, especially within what we consider are tougher economic operating conditions looking forward."

In response to why the rating action came before the end of RoadChef's capital expenditure program, Hillard said that they placed the notes on rating watch negative in July and they usually hope to resolve these reviews within two months. However, in this case they had waited for new senior management projections and to hear their strategy for the business going forward, following the equity injection.

Additional concerns were raised, however, regarding Welcome Break, which remains on Rating Watch Negative.

"Following the sale of the London Gateway lodge in a sale and leaseback transaction, and the decision by the company to use the cash for its capital expenditure program rather than using it to repay bondholders, we viewed this as detrimental to the bondholders, which was one factor in our decision to downgrade the bonds," Hillard said.

"What gives us cause for concern are future sale or lease and leaseback deals which the company is planning, and these might result in further rating actions and hence the notes are still on Rating Watch Negative."

The shock has come from the timing of the action, which resulted in the deals widening out by 100 basis points. Standard & Poor's placed both the single-A and triple-B notes on outlook negative. As Paterson explains: "The market is now waiting to see what S&P will do, and the investor reaction, as well as whether the debt is now finding its new value and whether there are buyers at these new levels."

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