Johannesburg, 5 May 2020 – GCR Ratings (“GCR”) has affirmed the national scale Issuer ratings assigned to Curro Holdings Limited of BBB+(ZA) and A2(ZA) for the long and short term respectively, with a Stable Outlook.
|Rated Entity / Issue||Rating class||Rating scale||Rating||Outlook / Watch|
|Curro Holdings Limited||Long Term Issuer||National||BBB+(ZA)||Stable Outlook|
|Short Term Issuer||National||A2(ZA)|
The ratings assigned to Curro Holdings Limited (“Curro” or “the group”) are underpinned by the stability of the education sector in the currently uncertain operating environment, coupled with the group’s positive earnings growth trajectory.
Curro’s financial profile continues to be burdened by high leverage, necessitated by capital expenditure and various acquisitions to achieve growth targets. During FY19, Curro’s gross debt increased by c.1.0bn to reach a peak of R4.0bn, almost double the debt outstanding at FY17. Despite sustained growth in earnings, net debt to EBITDA continued to trend upwards and increased to 5.6x at FY19, from 4.5x previously. EBITDA coverage of interest declined to 2.5x (FY18: 3.2x) and operating cash flow coverage of debt fell to 12% (FY18: 14%). That being said, investment activity is anticipated to be less aggressive going forward, in response to weakening fundamentals in the sector and with 76 schools, Curro is largely in line with its long-term target for 2020. Although there are a number of ongoing projects, in response to the disruption caused by the COVID-19 pandemic and the expectation for weaker economic growth, Curro has scaled back its capex budget for FY20 from the previous R800m, to be focused on necessary upgrades at existing schools.
Despite the high debt, Curro’s liquidity coverage of liabilities in the coming 12-month period is supported by the relatively long-dated maturity profile and cash conservation initiatives undertaken. Curro has sufficient unutilised facilities on hand to cover debt maturities in the coming 12 months, supporting a liquidity coverage ratio of 1.2x. GCR notes the concentration of maturities in the three- and five-year maturity buckets, but comfort is taken from the diversity of funders available to the group.
Earnings continue to be robust, on the back of positive learner enrolment at existing schools and successful integration of acquisitions. Nevertheless, its schools (particularly higher fee schools) face increased competition in feeder areas, as evidenced by the slower than anticipated revenue growth of 18% in FY19. In addition, GCR has built into our assumptions the risk to fees collection arising from economic pressure on parents as a result of the lockdown. This could further weaken the quality of the debtor’s book, after the bad debt expense doubled to a high of 1.7% of revenue at FY19 (FY18: 0.8%). This resulted from a deliberate effort to retain certain students, even if their payment record had deteriorated given the more challenging economic environment. Increased debtors’ risk is expected to be countered by the high recoveries achieved on bad debts. Even after incorporating stressed assumptions, GCR expects profitability to improve in FY20, given the significant economies of scale that should derive by improving capacity utilization as schools as they mature.
The Stable Outlook reflects the expectation of minimal earnings disruption to the education sector, and ongoing organic growth in learner numbers at existing schools.
Negative rating action would be considered if 1) the COVID related disruptions have a greater impact on earnings than expected, particularly if this leads to covenant levels being tested 2) the group does not achieve growth targets for learner numbers and earnings that are in line with historical observations 3) there is further deterioration of leverage metrics, 4) increased non-payment of fees leads to a reduction in operating cash flows. Positive rating action could follow a sustained improvement in earnings, coupled with a reduction in gearing. An increase in committed credit lines in order to improve liquidity coverage post the COVID-19 pandemic would also be viewed positively.
|Primary analyst||Tinashe Mujuru||Credit Analyst|
|Johannesburg, ZA||tinashem@GCRratings.com||+27 11 784 1771|
|Committee chair||Eyal Shevel||Sector Head: Corporate Ratings|
|Johannesburg, ZA||shevel@GCRratings.com||+27 11 784 1771|
Related Criteria and Research
|Criteria for the GCR Ratings Framework, May 2019|
|Criteria for Rating Corporate Companies, May 2019|
|GCR Ratings Scales, Symbols & Definitions, May 2019|
|GCR Country Risk Scores, January 2020|
|GCR Corporate Sector Risk Scores, March 2020|
Curro Holdings Limited
|Rating class||Review||Rating scale||Rating class||Outlook||Date|
|Long Term Issuer||Initial||National||BBB-(ZA)||Stable||May 2013|
|Short Term Issuer||Initial||National||A3(ZA)|
|Long Term Issuer||Last||National||BBB+(ZA)||Stable||July 2019|
|Short term Issuer||Last||National||A2(ZA)|
RISK SCORE SUMMARY
|Risk score||Curro Holdings Limited|
|Country risk score||7.50|
|Sector risk score||8.00|
|Management and governance||0.00|
|Leverage and capital structure||(3.00)|
|Total Risk Score||12.00|
|Cash Flow||The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.|
|Cash||Funds that can be readily spent or used to meet current obligations.|
|Conditions||Provisions inserted in an insurance contract that qualify or place limitations on the insurer’s promise to perform.|
|Covenant||A provision that is indicative of performance. Covenants are either positive or negative. Positive covenants are activities that the borrower commits to, typically in its normal course of business. Negative covenants are certain limits and restrictions on the borrowers’ activities.|
|Coverage||The scope of the protection provided under a contract of insurance.|
|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.|
|Diversification||Spreading risk by constructing a portfolio that contains different exposures whose returns are relatively uncorrelated. The term also refers to companies which move into markets or products that bear little relation to ones they already operate in.|
|Exposure||Exposure is the amount of risk the holder of an asset or security is faced with as a consequence of holding the security or asset. For a company, its exposure may relate to a particular product class or customer grouping. Exposure may also arise from an overreliance on one source of funding. In insurance, it refers to an individual or company’s vulnerability to various risks|
|Income||Money received, especially on a regular basis, for work or through investments.|
|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||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.|
|Issuer||The party indebted or the person making repayments for its borrowings.|
|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||See GCR Rating Scales, Symbols and Definitions.|
|Market||An assessment of the property value, with the value being compared to similar properties in the area.|
|Offset||A right (Right of Offset) to set liabilities against assets in any dispute over claims.|
|Operating Cash Flow||A company’s net cash position over a given period, i.e. money received from customers minus payments to suppliers and staff, administration expenses, interest payments and taxes.|
|Rating Outlook||See GCR Rating Scales, Symbols and Definitions.|
|Reserve||(1) An amount representing actual or potential liabilities kept by an insurer to cover debts to policyholders. (2) An amount allocated for a special purpose. Note that a reserve is usually a liability and not an extra fund. On occasion a reserve may be an asset, such as a reserve for taxes not yet due.|
|Reserves||A portion of funds allocated for an eventuality.|
|Risk||The chance of future uncertainty (i.e. deviation from expected earnings or an expected outcome) that will have an impact on objectives.|
|Short Term Rating||See GCR Rating Scales, Symbols and Definitions.|
|Short Term||Current; ordinarily less than one year.|
|Upgrade||The rating has been raised on its specific scale|
SALIENT POINTS 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.
The credit ratings have been disclosed to Curro Holdings Limited. The ratings above were solicited by, or on behalf of, the rated entity, and therefore, GCR has been compensated for the provision of the ratings.
Curro Holdings Limited participated in the rating process through management meetings, teleconferences and other written correspondence. Furthermore, the quality of information received was considered adequate and has been independently verified where possible. The information received from Curro Holdings Limited and other reliable third parties to accord the credit ratings included:
- The audited financial results for December 2019
- Four years of comparative audited numbers
- Industry presentation for FY19
- Detailed facility breakdown for FY19
- Cash flow projections for FY20 and FY21