Nord Anglia Education Inc. Downgraded To #B# On High Leverage, Weak Profit Outlook Stable

Stocks and Financial Services Press Releases Wednesday January 27, 2016 16:37
HONG KONG--27 Jan--Standard & Poor's

HONG KONG (Standard & Poor's) Jan. 27, 2016--Standard & Poor's RatingsServices said today that it had lowered its long-term corporate credit ratingon Nord Anglia Education Inc. to 'B' from 'B+'. The outlook is stable. We alsolowered our long-term issue rating on the company's guaranteed loans, notes,and revolving credit facility to 'B' from 'B+'. We affirmed our 'cnBB-'long-term Greater China regional scale ratings on the company and its debt.

At the same time, we affirmed our recovery rating on Nord Anglia's existingbank loans at '4H', indicating our expectations are at the upper end of"average" (30%-50%) recovery of the principal in the event of a paymentdefault. Nord Anglia is a Hong Kong-domiciled provider of premium educationservices with operations across the world.

"We lowered the rating because we expect Nord Anglia's leverage to stay highover the next 12 months due to the company's high debt and subduedprofitability," said Standard & Poor's credit analyst Lillian Chiou.

We expect Nord Anglia's debt to stay high because of the company's aggressivedebt-funded acquisitions and the inclusion of large and long-dated operatingleases from seven out of 10 newly acquired schools. We have also assumed thatthe company will sell and lease back the remaining three self-owned schoolpremises, and its operating lease-adjusted debt will increase over the next 12

months. We fully adjust these operating leases to calculate the company'sdebt.

We expect Nord Anglia's leverage will stay materially higher than our upgradetrigger of 6.0x over the next 12 months, although a full recognition of newlyacquired schools could bring down the ratio to 7.5x-8.5x from 10.5x as of thefiscal year ended Aug. 31, 2015. We continue to assess Nord Anglia's financial

risk profile as highly leveraged.

Nord Anglia's earning power has weakened, in our opinion, although thecompany's profit margin is still higher than the industry average. Growth inNord Anglia's profitability could stay subdued as a result of higher costs fornewly opened schools in Chicago and Aubonne and faster expansion in lower

margin countries such as Vietnam. We also expect the strong U.S. dollar topressure the company's topline growth. Challenging operating conditions inNord Anglia's key markets such as China will continue to weigh on thecompany's operating performance over the next 12 months. As a result, EBITDAmargin could decrease to 29%-30% over the period from 32.1% in fiscal 2015. We

expect the company's capability to raise tuition fees by 1.5x-2.0x ofinflation and potential cost savings after integrating new schools acquiredfrom Vietnam-based British International School Group and Meritas SchoolsHoldings LLC could partly offset the weaknesses.

We expect Nord Anglia to continue to drive growth through proactiveacquisitions given the company's aggressive growth strategy. We believe thatany material improvement in the company's financial leverage is unlikely inthe next 12 months. Therefore, we have revised our assessment of comparablerating analysis to neutral from positive.

We expect Nord Anglia's geographic diversity to improve post the acquisitionof six Meritas schools and four international schools in Vietnam, resulting ina more balanced revenue and EBITDA distribution and stable growth.

Nord Anglia's enlarged scale will improve its competitive advantage, in ouropinion. The company is one of the largest premium international schooloperators globally and is likely to sustain its market position amid a highlyfragmented and competitive education services market. We believe the above

factors underpin our assessment of Nord Anglia's business risk profile asfair.

"The stable outlook reflects our view that Nord Anglia will maintain its goodmarket position in the premium school segment and continue to expand over thenext 12 months through organic growth and acquisitions," said Ms. Chiou. "Webelieve the company's strong growth momentum, good profitability, and highvisibility on cash flows temper the risk of an aggressive financial policy andhigh leverage."

We could lower the rating if Nord Anglia makes more aggressive andcash-exhaustive acquisitions than we expect, such that its liquiditydeteriorates significantly. We could also lower the rating if the company'smarket position and profitability weaken significantly due to materiallyadverse operating conditions globally or weak integration of recentacquisitions. However, we consider such downside risk as limited.

We could raise the rating if the company can consistently improve itsfinancial risk profile while maintaining its good market position andprofitability. A reduction of the debt-to-EBITDA ratio consistently andcomfortably below 6.0x while EBITDA interest coverage stays above 3.0x wouldindicate such improvement.


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