Johannesburg, 04 December 2017 – Global Credit Ratings (“GCR”) has today affirmed the national scale Issuer ratings accorded 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, GCR has affirmed the international scale local currency long term rating of B+, with the outlook accorded as Negative.
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 are underpinned by the strength of Educor’s well-established face-to-face and distance education brands, offering an extensive range of accredited qualifications and courses targeted at various LSM groupings. Although the group historically accumulated substantial losses, as it was not being given strategic and operational focus when it was a non-core investment of a listed group, the traditional brands have continued to perform strongly through the cycle.
While Educor in its current guise has a short profitability track record, the strength of management, the overhaul of operating structures since its acquisition by private equity fund A1 Capital Proprietary Limited (“A1 Capital”), augmentation of governance structures, and expansion of programme offerings (partly through the acquisition of established international brands) is supportive of sustainable growth and enhanced earnings predictability.
The investment in technology-based offerings, particularly the global classroom concept (being rolled out on the back of the London College of International Business Studies acquisition), and the Academic Advising Centres, which coupled with the augmentation of internal IT systems, should improve delivery, enabling Educor to expand into selected territories in the rest of Africa (“RoA”), and increase its enrolment and student retention rates locally. In this regard, compound annual growth in SA revenue of 21% is budgeted for the five years to FY21, with an average normalised EBITDA margin of at least 20% expected to be derived from enhanced operating leverage. Moderate variability in the earnings targets can be absorbed within the rating range, albeit an erratic/volatile profit trajectory would place pressure on the ratings.
Although plans to access equity capital markets over the rating horizon have been noted, A1 Capital’s strategic execution in terms of sustaining an investment’s profitability and a moderately conservative credit risk profile through to a successful listing is unproven. The linkages with strongly rated counterparties, including the Public Investment Corporation via its investment in property business Educor Property Holdings (“EPH”), the R240m facility from the Bank of China, as well as relationships with Nedbank, FirstRand Bank, Absa, and Standard Bank are positively noted.
The group’s external borrowings are budgeted to stabilise at c.R1bn in the medium term (FY16: R690m), from just R127m at FY13, being mostly EPH debt and to lesser extent, funding for IT infrastructure. Net debt to EBITDA remains the key metric in this regard, and is projected to peak at c.3.5x at FY17 (5.8x when stressed to include transient intragroup exposures), thereafter easing to range from 1.8-2.8x (stressed: 3.4-4.6x) from FY17-19, on the back of the profit retention and ample liquidity.
Spend on private higher education is becoming increasingly income inelastic, as consumers seek quality, internationally recognised offerings amidst state funding constraints. That said, regulatory uncertainty/limitations domestically and in other targeted territories present some risk to strategic execution in the industry.
The international scale rating is highly susceptible to further weakness in the SA sovereign credit profile. Other considerations include the liquidity and ease of convertibility of the Rand, the ease of transfer of capital from SA, strong funding counterparties, and the expected natural hedge from international cash flows.
Looking ahead, traction from new technology-based delivery formats, and the bedding down of governance and operational structures, supporting robust cash flows amidst a conservative funding profile would bode positively in the medium term. Conversely, operational or diversification challenges, leading to erratic operating performance and cash flows would warrant negative rating action. Aggressive elevation of gearing to fund properties, regional rollout, or investment in internal structures that push net debt to EBITDA materially beyond guidance could result in a downgrade.
|NATIONAL SCALE RATINGS HISTORY
Initial/last rating (December 2016)
Rating outlook: Stable
|INTERNATIONAL SCALE RATINGS HISTORY
Initial rating (December 2016)
International LC: BB-
Rating outlook: Stable
Last rating (May 2017)
International LC: B+
Rating outlook: Negative
Senior Credit Analyst: Corporate Ratings
+27 11 784 1771
Sector Head: Corporate Ratings
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APPLICABLE METHODOLOGIES AND RELATED RESEARCH
Global Master Criteria for Rating Corporate Entities, Updated February 2017
Educor Holdings Proprietary Limited Issuer Rating Report, 2016
GCR’s International Scale to National Scale Mapping Table – South Africa (2017-04-26)
RATING LIMITATIONS AND DISCLAIMERS
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GLOSSARY OF TERMS/ACRONYMS USED IN THIS DOCUMENT AS PER GCR’S CORPORATES GLOSSARY
|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 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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|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.|
|National Scale Rating||The national scale provides a relative measure of creditworthiness for rated entities only within the country concerned. Under this rating scale, a ‘AAA’ long term national scale rating will typically be assigned to the lowest relative risk within that country, which in most cases will be the sovereign state.|
|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.|
|Rating Outlook||A Rating outlook indicates the potential direction of a rated entity’s rating over the medium term, typically one to two years. An outlook may be defined as: ‘Stable’ (nothing to suggest that the rating will change), ‘Positive’ (the rating symbol may be raised), ‘Negative’ (the rating symbol may be lowered) or ‘Evolving’ (the rating symbol may be raised or lowered).|
|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 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.
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 Proprietary Limited 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 2016 audited annual financial statements for Educor Holdings Proprietary Limited and its subsidiaries (plus three years of comparative numbers);
- comprehensive medium-term projections to 2021;
- year to date management accounts for the six months to 30 June 2017 for Educor Holdings Proprietary Limited and its subsidiaries;
- an EPH investment property profile at 30 June 2017;
- 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 affirms Educor Holdings Proprietary Limited’s Issuer rating of BBB-(ZA); Outlook Stable