Johannesburg, 21 February 2017 — Global Credit Ratings has today accorded first time national scale Issuer ratings to Educor Holdings Proprietary Limited of BBB-(ZA) and A3(ZA) for the long and short term respectively; with the outlook accorded as Stable. Concurrently, an international scale local currency long term rating of BB- was also accorded to Educor Holdings Proprietary Limited, with the outlook accorded as Stable.
SUMMARY RATING RATIONALE
Global Credit Ratings (“GCR”) has accorded the above credit ratings to Educor Holdings Proprietary Limited (“Educor”) based on the following key criteria:
The ratings take cognisance of Educor’s well entrenched brands, which have been synonymous with adult and distance education for several decades. While group performance was previously hindered by insufficient management focus when it was a non-core asset in a listed group, it has returned to profitability under its latest parent, private equity fund A1 Capital (Pty) Ltd. While A1 Capital’s strategic execution in terms of sustaining the marked turnaround in performance through to a successful listing is untested, GCR gives credence to sound delivery in respect of building up structures to attract strong institutional funders. Specifically, the streamlining of operating structures, coupled with the augmentation of course offerings (partly through acquisition of other quality, international brands), has positioned Educor to be able to expand into a number of selected territories in the rest of Africa (“RoA”) over the medium term. Accordingly, the Public Investment Corporation’s (“PIC”) investment and commitment to supporting the growth of the property business (Educor Property Holdings), and the R200m facility recently secured from the Bank of China to finance growth into RoA, are considered to be ratings positive.
Although note is taken of sizeable loss accumulation historically, GCR’s financial analysis has focused on performance since F13 and the sustainability of medium term projections for the domestic businesses. Management projects a compound annual growth in revenue of 11% from F16 to F21, an average EBIT margin of 25%, while free cash flow cover of net external debt is likely to average 0.7x. The group’s scalable, low cost structures enhance operating leverage, allowing for the planned ramp up of enrolments without compressing margins. Medium term budgets are deemed to be moderately conservative.
Educor has kept gearing moderate, and plans to sustain this strategy post the re-profiling of its brands’ funding profiles. GCR deems debt to EBITDA (excluding intragroup loans) the key metric in this regard, and this is projected to trend well below 300%, on the back of the full retention of profits and ample liquidity.
While the RoA rollout will be cautious, associated investment risk cannot be reasonably assessed in the absence of a comprehensive, quantified medium term strategy. Nevertheless, GCR does expect prudent insulation of domestic cash flows from investment risk related to RoA operations, for Educor to adopt a tax efficient structure, and for gearing/debt service ratios to be sustained at comfortable levels overall.
In according the international rating, GCR factors in the strong sovereign ratings in respect of Educor’s domicile, the liquidity and ease of convertibility of the Rand, ease of transfer of capital from South Africa, strong funding counterparties, and the expected natural hedge from international cash flows.
Educor will continue to benefit from latent demand for quality, accredited, and correctly priced qualifications and courses, to accommodate students across a wide range of income levels. However, it has to contend with rigorous and occasionally ambivalent regulatory requirements in South Africa and other targeted territories.
Upward rating migration is not considered likely in the medium term but in the long term could derive from the continued refinement of operational structures, supporting robust cash flows, and complemented by a cautious and conservatively funded RoA expansion. Conversely, operational/diversification challenges, leading to erratic operating performance and cash flows could warrant negative rating action. Aggressive or rapid gearing to fund properties, regional rollout, or investment in internal structures, pushing net debt to EBITDA beyond the 500%-600% range would result in a downgrade
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (December 2016)|
|Rating outlook: Stable|
|International LC: BB-|
|Rating outlook: Stable|
|Senior Credit Analyst|
|Sector Head: Corporate Ratings|
APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Criteria for rating corporate entities, updated February 2016
Educor Holdings Proprietary Limited rating report, 2016
RATING LIMITATIONS AND DISCLAIMERS
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|Budget||Financial plan that serves as an estimate of future cost, revenues or both.|
|Capital||The sum of money that is invested to generate proceeds.|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Debt||An obligation to repay a sum of money. More specifically, it is funds passed from a creditor to a debtor in exchange for interest and a commitment to repay the principal in full on a specified date or over a specified period.|
|Downgrade||The assignment of a lower credit rating to a corporate or sovereign borrower’s debt by a credit rating agency. Opposite of upgrade.|
|Equity||Equity is the holding or stake that shareholders have in a company. Equity capital is raised by the issue of new shares or by retaining profit.|
|Gearing||With regard to corporate analysis, gearing (or leverage) refers to the extent to which a company is funded by debt and can be calculated by dividing its debt by shareholders’ funds or by EBITDA.|
|Hedge||A form of insurance against financial loss or other adverse circumstances.|
|International Scale Rating LC||International local currency (International LC) ratings measure the likelihood of repayment in the currency of the jurisdiction in which the issuer is domiciled. Therefore, the rating does not take into account the possibility that it will not be able to convert local currency into foreign currency or make transfers between sovereign jurisdictions.|
|Leverage||With regard to corporate analysis, leverage (or gearing) refers to the extent to which a company is funded by debt.|
|Liquidity||The speed at which assets can be converted to cash. It can also refer to the ability of a company to service its debt obligations due to the presence of liquid assets such as cash and its equivalents. Market liquidity refers to the ease with which a security can be bought or sold quickly and in large volumes without substantially affecting the market price.|
|Long-Term Rating||A long term rating reflects an issuer’s ability to meet its financial obligations over the following three to five year period, including interest payments and debt redemptions. This encompasses an evaluation of the organisation’s current financial position, as well as how the position may change in the future with regard to meeting longer term financial obligations.|
|Margin||A term whose meaning depends on the context. In the widest sense, it means the difference between two values.|
|Private Equity Fund||Private equity funds are firms that invest pools of capital raised from financial institutions in a wide range of commercial projects managed by investment professionals. They are normally not listed on stock exchanges, though some have gone public in recent years.|
|Risk||The possibility that an investment or venture will make a loss or not make the returns expected. There are many different types of risk including basis risk, country risk, credit risk, currency risk, economic risk, inflation risk, liquidity risk, market or systemic risk, political risk, settlement risk and translation risk.|
|Short-Term Rating||A short term rating is an opinion of an issuer’s ability to meet all financial obligations over the upcoming 12 month period, including interest payments and debt redemptions.|
SALIENT FEATURES OF ACCORDED RATINGS
GCR affirms that a.) no part of the rating process was influenced by any other business activities of the credit rating agency; b.) the ratings were based solely on the merits of the rated entity, security or financial instrument being rated; c.) such ratings were an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the ratings is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.
Educor Holdings Proprietary Limited participated in the rating process via face-to-face management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible.
The credit ratings have been disclosed Educor Holdings with no contestation of the ratings.
The information received from Educor Holdings Proprietary Limited and other reliable third parties to accord the credit ratings included:
- the 2015 audited annual financial statements for Educor Holdings Proprietary Limited and its subsidiaries (plus two years of comparative numbers);
- comprehensive medium term projections to 2021;
- year to date management accounts for the eight months to 31 August for Educor Holdings Proprietary Limited and its subsidiaries;
- an overview of planned governance/risk structures;
- a draft group Information Memorandum;
- various subsidiary and group information packs;
- industry and regulatory data; and
- group operating statistics.
The ratings above were solicited by, or on behalf of, the rated client, and therefore, GCR has been compensated for the provision of the ratings.
GCR accords Educor a first time national scale rating of BBB-(ZA); Stable Outlook; and an international scale rating of BB-; Stable.