Johannesburg, 07 Apr 2014 — Global Credit Ratings has today affirmed the long term national scale and affirmed the short term national scale issuer ratings assigned to Curro Holdings Limited of BBB-(ZA) and A3(ZA) respectively; with the outlook accorded as Stable.
Global Credit Ratings has accorded the above credit rating(s) on Curro Holdings Limited based on the following key criteria:
Curro Holdings Limited (“Curro”) is a listed private school operator, with a proven operating model that has enabled rapid growth through acquisitions and the development of new schools. This has seen revenue rise from R74m in F10 to R659m in F13 (F12: R356m), and operating profit rise from R9.8m to R76.7m over the same time (F12: R35.4m). Accordingly, the operating margin widened from a low of 2.3% in F11 to 11.6% in F13 (F12: 9.9%), with further improvements expected as growth slows and a higher proportion of the school portfolio attains maturity. This rapid growth has been supported by majority shareholder, PSG Group Limited (57.1% stake), which has provided strong capital support directly (and indrectly by facilitating investment in Curro), as well as enabling access to banking and institutional debt funding. In F13, R661m in new equity was supplemented by several new sources of debt, including a first listed secured corporate bond. Given this role played by PSG, GCR’s ratings are strongly premised on the ongoing financial and technical support of PSG to Curro.
Despite strong equity support and improving performances from existing schools, Curro continues to report elevated gearing and credit risk measures, with FYE13 net gearing and net debt to EBITDA reported at 58% and 656% respectively. While the earnings-based gearing is particularly elevated, this is explained/mitigated by several factors. In this regard, net debt to EBITDA is a lagging metric, while the debt raised by Curro has (apart from acquisitions) been used to acquire land and construct schools, which only contribute to earnings in the future. To mitigate this, Curro’s debt is mostly long term in maturity, with amortising instruments typically including a principal moratorium to ensure that the schools constructed with the debt funding have time to reach adequate capacity utilisation. Furthermore, R326m of debt used to fund the Meridian low-fee schools is ringfenced to Curro’s 65%-owned subsidiary, Campus and Property Management Company (Pty) Limited (“CAPMAC”), the funders of which have no recourse to Curro’s other assets. Excluding CAPMAC, net gearing and net debt to EBITDA would have been much more comfortable at 33% and 474% respectively at FYE13. GCR’s ratings for Curro specifically exclude any assessment of its (or CAPMAC’s) ability to service the ringfenced obligations.
Looking ahead, Curro’s growth will remain aggressive, with over R1bn of construction and land banking spend expected in 2014 alone, which would see Curro’s balance sheet double in a single year. While a further rights issue of R589m has been confirmed, significant debt funding will also be raised. GCR takes comfort from Curro’s ability to build and operate schools, as well as the strong certainty of earnings from existing schools. Nevertheless, excessive earnings -based gearing measures are not congruent with investment grade companies. Thus, GCR will closely monitor Curro’s standalone net debt to leading EBITDA (based on actual enrollment numbers), and should this ratio exceed 600% it would likely trigger negative rating action. Similarly, material delays in schools under construction and/or significantly weaker than projected demand in several schools, which in turn would impact future earnings, could trigger negative rating action. In addition, a material reduction in the level of support from PSG to Curro could have negative ratings implications. Conversely, positive rating action is only likely once Curro’s growth begins to slow, and a larger proportion of its schools are operating at high capacity utilisation. This would see the group become strongly cash generative and funding strain reduce markedly, as well as decreasing the import of other risks associated with growth.
|NATIONAL SCALE RATINGS HISTORY|
|Initial rating (May/2013)|
|Long term: BBB-(ZA); Short term: A3(ZA)|
|Last rating (May/2013)|
|Long term: BBB-(ZA); Short term: A3(ZA)|
|+27 11 784 1771|
|Sector Head: Corporates|
|+27 11 784 1771|
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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 Curro Holdings Limited with no contestation of the rating.
The information received from Curro Holdings Limited and other reliable third parties to accord the credit rating included the 2013 audited annual financial statements (plus four years of comparative numbers), financial statements for CAPMAC, most recent board reports, full year budgeted financial statements, capital expenditure budgets, corporate governance and enterprise risk framework, industry comparative data and regulatory framework and a breakdown of facilities available and related counterparties. In addition, information specific to the rated entity and/or industry was also received.
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 affirms Curro Holdings Limited’s rating of BBB-(ZA); outlook Stable