Announcements Corporate Rating Alerts

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

Johannesburg, 01 March 2019 – Global Credit Ratings (“GCR”) has today downgraded the national scale Issuer ratings accorded to Educor Holdings Proprietary Limited to B+(ZA) and B(ZA) for the long and short term respectively; with the ratings on Rating Watch with negative implications. Concurrently, GCR has downgraded the international scale local currency long term rating to B-, also placing it on Rating Watch with negative implications.

SUMMARY RATING RATIONALE

GCR has accorded the above ratings to Educor Holdings Proprietary Limited (“Educor”) based on the following key criteria:

The downgrade follows rating action taken in December 2018, on the back of a marked elevation in gearing, which led to certain covenant breaches. This has materially exacerbated liquidity and refinancing risk, especially as there are currently no committed unutilised lines of credit in place to cover a potential acceleration of payment of the impacted facilities.

Educor is pursuing a number of steps to reduce debt and to achieve comfortable gearing and debt serviceability. However, some of these initiatives are still at early stages, and GCR is therefore of the view that there is considerable execution risk. GCR will continue to monitor the timely execution of the deleveraging and refinancing interventions, with a view to stabilising the funding profile. Accordingly, the ratings remain on Rating Watch, to be reviewed by 30 June 2019.

Note has been taken of the inherently sound earnings profile of the main education brands, underpinned by technology-driven initiatives, competitive pricing and a strong baseline demand for tertiary offerings. Educor will be expected to demonstrate its ability to sustain adequate profitability through higher capacity utilisation and efficiency enhancements amidst a challenging operating climate.

Further negative rating action would follow if Educor fails to complete the outstanding debt reduction initiatives in the short term. Erratic/persistently negative cash flows, which could result from/be exacerbated by the disposal of any of the key brands, could also warrant a further downgrade. Conversely, upward rating movement could be considered with the finalisation of ongoing deleveraging processes, as well as improved retained cash flows and evidence of external sources of liquidity to cover short-term debt obligations.

NATIONAL SCALE RATINGS HISTORY

Initial rating (December 2016)

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

Rating outlook: Stable

Last rating (December 2018)

Long term: BB+(ZA); Short term: B(ZA)

Rating outlook: Rating Watch

INTERNATIONAL SCALE RATINGS HISTORY

Initial rating (December 2016)

International LC: BB-

Rating outlook: Stable

Last rating (December 2018)

International LC: B

Rating outlook: Rating Watch
   
ANALYTICAL CONTACTS  

Primary 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, 2016-18

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

Capital The sum of money that is invested to generate proceeds.
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 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.
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.
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.
   

For a detailed glossary of terms utilised, please click here


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 telephonic communication as well as 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.

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

  • Correspondence from a key funder of the group
  • Transfer documentation in respect of recent property investment disposals
  • Correspondence attesting to ongoing refinancing processes

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 B+(ZA); Rating Watch

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