Announcements

GCR affirms Curro Holdings Limited’s rating of BBB-(ZA); Outlook Positive

Johannesburg, 29 May 2015 — Global Credit Ratings has today affirmed the national scale ratings assigned to Curro Holdings Limited of BBB-(ZA) and A3(ZA) in the long term and short term respectively; with the outlook accorded as Positive.

SUMMARY RATING RATIONALE

Global Credit Ratings has accorded the above credit rating(s) to Curro Holdings Limited based on the following key criteria:

Curro is a listed independent private school educator operating in South Africa, and is majority owned by PSG Group Limited (“PSG”). Since listing in 2011, Curro has attained rapid growth through the development and acquisition of campuses, with it reporting a portfolio of 42 schools and more than 36,000 learners as of January 2015. This growth has been strongly supported by ongoing financial and technical support from PSG, which also facilitated the group’s listing and subsequent debt and equity capital raising activities. As such, Curro’s ratings are premised on PSG’s ongoing shareholding and support. The domestic private school industry reports robust prospects, with a growing middle class and a strained public education system providing strong impetus to growth.

Private schools are fixed capital intensive, but report long useful lives and are strongly cash generative when adequately populated. As such, once constructed or acquired, schools bear large fixed overheads but low variable costs. Profitability is thus determined by school fee structures and capacity utilisation, with breakeven capacities typically between 25% and 35%. In F14, a higher 59% of schools reported capacity utilisation above 50%, from 50% in F13, attesting to ongoing maturation of the portfolio. Aided by acquisitions of performing schools, this higher capacity utilisation has underpinned robust revenue and earnings growth. Together with the addition of six schools to the portfolio, this saw revenue rise 52% to top R1bn, while EBITDA rose by 68% to R191m. Accordingly, the EBITDA margin widened to 19.1% in F14 (F13: 17.2%), which saw EBITDA per learner rise to R9,127 (F13: R7,371).

Curro’s growth has been enabled by periodic equity and debt capital raising, with the group having raised R2.8bn in equity since listing (including the 2015 rights issue) and increased net debt by R1.1bn over the same time. This has sustained the group’s solvency, with net gearing (excluding goodwill) amounting to 66% at FYE14. More saliently, net debt to EBITDA has moderated from 1,191% at FYE11 to 641% at FYE14, while net interest cover has improved over the same time from 0.2x to 1.6x. If the legally ringfenced Meridian Academy operations were excluded, net gearing and net debt to EBITDA would have been much more comfortable at 37% and 454% respectively at FYE14.

The positive outlook accorded to Curro’s national scale ratings has been a function of the group’s strong operating performance and cash flows, as well as the expectation of sustained growth going forward and a resultant moderation in gearing metrics. Accordingly, an upgrade of Curro’s ratings would be premised upon the attainment of budgets, and in particular the achievement of budgeted credit risk metrics. In contrast, material delays in terms of schools under construction could constrain revenue and earnings, and resultantly impact debt serviceability. In this regard, GCR considers a net debt to leading EBITDA of 600% for Curro on a standalone basis (excluding ringfenced operations) to be the prudential gearing limit for a BBB-(ZA) long term rating. As such, should net debt to leading EBITDA for Curro on a standalone basis exceed 600%, this could trigger negative rating action. In addition, an adverse change in level of support to Curro from PSG would have a negative impact on Curro’s credit risk profile.

NATIONAL SCALE RATINGS HISTORY    
     
Initial rating (May 2013)    
Long term: BBB-(ZA); Short term: A3(ZA)    
Outlook: Stable    
     
Last rating (March 2014)    
Long term: BBB-(ZA); Short term: A3(ZA)    
Outlook: Stable    
     

ANALYTICAL CONTACTS

Primary Analyst    
Richard Hoffman    
Senior Analyst    
(011) 784-1771    
Hoffman@globalratings.net    
     
Committee Chairperson    
Eyal Shevel    
Sector Head: Corporate Ratings    
(011) 784-1771    
Shevel@globalratings.net    

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Criteria for Rating Corporate Entities, updated February 2015

Curro Holdings Limited Rating Reports, 2013-2014

Curro Secured Bond New Issuance and Surveillance Reports, 2013-2014

RATING LIMITATIONS AND DISCLAIMERS

ALL GCR’S CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://GLOBALRATINGS.NET/UNDERSTANDING-RATINGS. IN ADDITION, GCR’S RATING SCALES AND DEFINITIONS ARE ALSO AVAILABLE FOR DOWNLOAD AT THE FOLLOWING LINK: HTTP://GLOBALRATINGS.NET/RATINGS-INFO. GCR’S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, PUBLICATION TERMS AND CONDITIONS AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE AT HTTP://GLOBALRATINGS.NET.

SALIENT FEATURES OF ACCORDED RATINGS

GCR affirms that a.) no part of the rating was influenced by any other business activities of the credit rating agency; b.) the rating was based solely on the merits of the rated entity, security or financial instrument being rated; c.) such rating was an independent evaluation of the risks and merits of the rated entity, security or financial instrument; and d.) the validity of the rating is for a maximum of 12 months, or earlier as indicated by the applicable credit rating document.

Curro Holdings 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 rating/s has been disclosed to and contested by Curro Holdings Limited and was not amended following the provision of further material information by the entity.

The information received from Curro Holdings Limited and other reliable third parties to accord the credit rating included:

– 2014 audited financial statements, and four years of audited financial statements;

– Budgets for 2015, and ten year budget plan;

– Details of debt facilities and utilisation; and

– 2014 audited financial statements for CAPMAC and MOP.

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.

GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATE GLOSSARY

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.
Capital Intensive A project, a business or a production process is said to be capital intensive if it uses large amounts of assets to produce goods or services. Examples are oil refineries, and airlines. Projects/businesses can be either fixed capital intensive or working capital intensive or a combination.
Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
Credit Rating An opinion regarding the creditworthiness of an entity, a security or financial instrument, or an issuer of securities or financial instruments, using an established and defined ranking system of rating categories.
Credit Rating Agency An entity that provides credit rating services.
Credit Risk The possibility that a bond issuer or any other borrowers (including debtors/creditors) will default and fail to pay the principal and interest when due.
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.
Default Failure to meet the payment obligation of either interest or principal on a debt or bond. Technically, a borrower does not default, the initiative comes from the lender who declares that the borrower is in default.
EBITDA EBITDA is useful for comparing the income of companies with different asset structures. EBITDA is usually closely aligned to cash generated by operations.
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.
Fix The setting of a currency or commodity price for trade at a future date.
Fixed Capital Fixed capital is the part of a company’s total capital that is invested in fixed assets such as land, buildings and equipment that remains on the balance sheet, usually for years, but for at least one accounting period.
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.
Goodwill Arises upon the sale/acquisition of a business and is defined as an established entity’s reputation, which may be regarded as a quantifiable asset and calculated as the price paid for a company over and above the net value of its assets. Negative goodwill refers to a situation when the price paid for a company is lower than the value of its assets.
Interest Scheduled payments made to a creditor in return for the use of borrowed money. The size of the payments will be determined by the interest rate, the amount borrowed or principal and the duration of the loan.
Interest Cover Interest cover is a measure of a company’s interest payments relative to its profits. It is calculated by dividing a company’s operating profit by its interest payments for a given period.
Interest Rate The charge or the return on an asset or debt expressed as a percentage of the price or size of the asset or debt. It is usually expressed on an annual basis.
LC An LC is a guarantee by a bank on behalf of a corporate customer that payment will be made if that entity cannot to meet its obligations.
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. 
Liquidity Risk The risk that a company may not be able to meet its financial obligations or other operational cash requirements due to an inability to timeously realise cash from its assets. Regarding securities, the risk that a financial instrument cannot be traded at its market price due to the size, structure or efficiency of the market.
Margin A term whose meaning depends on the context. In the widest sense, it means the difference between two values.
Operating Profit Profits from a company’s ordinary revenue-producing activities, calculated before taxes and interest costs.
Portfolio A collection of investments held by an individual investor or financial institution. They may include stocks, bonds, futures contracts, options, real estate investments or any item that the holder believes will retain its value.
Principal The total amount borrowed or lent, e.g. the face value of a bond, excluding interest.
Redemption The repurchase of a bond at maturity by the issuer.
REPO In a REPO one party sells assets or securities to another and agrees to repurchase them later at a set price on a specified date.
Rights Issue One of the ways that a company can raise additional funds is to issue new shares. These must be first offered to current shareholders and a rights issue allows a shareholder to buy shares in proportion to the number already held. 
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.
Shareholder An individual, entity or financial institution that holds shares or stock in an organisation or company.
Variable Costs A cost that varies with the volume of production or sales, such as the cost of raw materials or packaging. In contrast with fixed costs, such as rent, which stay the same regardless of the volume of production or sales.
Working Capital Working capital usually refers to the resources that a company uses to finance day-to-day operations. Changes in working capital are assessed to explain movements in debt and cash balances.

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