Announcements Corporate Rating Alerts

GCR downgrades Educor Holdings Proprietary Limited’s Issuer rating to BB+(ZA); Rating Watch

Johannesburg, 21 December 2018 – Global Credit Ratings (“GCR”) has today downgraded the national scale Issuer ratings accorded to Educor Holdings Proprietary Limited to BB+(ZA) and B(ZA) for the long and short term respectively; with the ratings placed on Rating Watch. Concurrently, GCR has downgraded the international scale local currency long term rating to B, also placing it on Rating Watch.

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 downgrade is premised on the deterioration in the group’s credit risk profile, on the back of a marked elevation in gearing, as well as negative cash flows, which led to covenant breaches. Specifically, interest bearing debt almost doubled to R1.3bn at FY17, rising further to R1.5bn as of August 2018, mainly to fund growth of the property portfolio. This saw a breach of Educor Property Holdings’ (“EPH”) LTV limit of 60%, and the group debt service coverage covenant of 1.5x. Net debt to EBITDA also rose sharply to 5.1x at FY17 (5.4x including intragroup exposures), exceeding internal projections.

Free cash flows were sound historically, but debt service metrics have recently come under pressure, which has also negatively impacted the ratings. Nonetheless Educor continues to reflect a moderately strong earnings profile, with margin protection deriving from regulatory rigour in the industry and competitive pricing points for Educor’s key offerings. Pressure in the short term is expected from increased overheads on the back of capacity building, while distance brands in particular have been adversely impacted by the fees dispensation for qualifying students in public tertiary institutions amidst a challenging operating climate. Medium term margin progression is expected to be supported by higher capacity utilisation and enhanced overall efficiency.

The current ratings do take cognisance of Educor’s efforts to remedy the covenant breach and excessive gearing. Specifically, management has indicated that Educor is in discussions to reduce the debt burden and introduce new shareholders to the group. As per management, these initiatives are expected to be implemented early in the new year.

Accordingly, GCR has placed the ratings on Rating Watch to monitor progress in this regard, with the ratings set to be reviewed by 28 February 2019. Negative rating action will follow if there is no significant demonstrated progress on the recapitalisation and debt reduction initiatives (including the sale of certain properties) that Educor has committed to. Persistent negative retained cash flows could also warrant a further downgrade. Conversely, successful interventions to materially reduce gearing, create substantive headroom on the remaining covenant(s), and improve cash flows will be positively considered.

The international scale rating is correlated to movements in the SA sovereign credit profile. Other factors include the liquidity and ease of convertibility of the Rand, the ease of transfer of capital from SA and strong funding counterparties.

NATIONAL SCALE RATINGS HISTORY

Initial rating (December 2016)

Long term: BBB-(ZA); Short term: A3(ZA)

Rating outlook: Stable

Last rating (December 2017)

Long term: BBB-(ZA); Short term: A3(ZA)

Rating outlook: Stable

INTERNATIONAL SCALE RATINGS HISTORY

Initial rating (December 2016)

International LC: BB-

Rating outlook: Stable

Last rating (June 2018)

International LC: B+

Rating outlook: Stable

   
ANALYTICAL CONTACTS  

Analyst

Patricia Zvarayi

Senior Analyst: Corporate Ratings

+27 11 784 1771

patricia@globalratings.net

Committee Chairperson

Eyal Shevel

Sector Head: Corporate Ratings

+27 11 784 1771

shevel@globalratings.net

APPLICABLE METHODOLOGIES AND RELATED RESEARCH

Global Master Criteria for Rating Corporate Entities, Updated February 2018

Educor Holdings Proprietary Limited Issuer Rating Reports, 2016-17

GCR’s International Scale to National Scale Mapping Table – South Africa (2018-05-17)

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.

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

Cash Flow The inflow and outflow of cash and cash equivalents. Such flows arise from operating, investing and financing activities.
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.
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.
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.
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.
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).
Rating Watch Indicates that a rating is under review for possible change in the short term and the movement may be either positive or negative.
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 to Educor Holdings Proprietary Limited, and were amended following an appeal.

The information received from Educor Holdings Proprietary Limited and other reliable third parties to accord the credit ratings included:

  • the 2017 audited annual financial statements for Educor Holdings Proprietary Limited and its subsidiaries (plus four years of comparative numbers);
  • comprehensive medium-term projections (SA) to 2021;
  • year to date management accounts to 31 August 2018 for Educor Holdings Proprietary Limited and its subsidiaries;
  • a September 2018 loan schedule, and;
  • communication and internal documentation, including a shareholder resolution in support of the appeal.

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 downgrades Educor Holdings Proprietary Limited’s Issuer rating to BB+(ZA); Rating Watch

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ALL GCR CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS, TERMS OF USE OF SUCH RATINGS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS, TERMS OF USE AND DISCLAIMERS BY FOLLOWING THIS LINK:HTTP://GCRRATINGS.COM. IN ADDITION, RATING SCALES AND DEFINITIONS ARE AVAILABLE ON GCR’S PUBLIC WEB SITE AT WWW.GCRRATINGS.COM/RATING_INFORMATION. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. GCR's CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THIS SITE.

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