Laureate Education, Inc.
Moody’s downgrades Laureate Education’s CFR to B3 from B2
Global Credit Research – 01 Jul 2015
Approximately $3.5 billion of debt instruments affected
New York, July 01, 2015 — Moody’s Investors Service downgraded the Corporate Family Rating for Laureate Education, Inc. (“Laureate”) to B3 from B2 and its Probability of Default Rating to B3-PD from B2-PD. At the same time, Moody’s lowered the ratings of Laureate’s senior secured credit facilities to B3 from B2, as well as the company’s senior notes due 2019, to Caa2 from Caa1, and assigned a B3 rating to the company’s amended senior secured revolving credit facility due 2018. The rating outlook was changed to stable from negative.
According to Moody’s analyst David Berge, “Laureate’s aggressive growth has created persistently-high leverage and has strained the company’s liquidity.”
Corporate Family Rating, Downgraded to B3 from B2
Probability of Default Rating, Downgraded to B3-PD from B2-PD
Senior Secured Bank Credit Facility Jun 16, 2018, Downgraded to B3 (LGD3) from B2 (LGD4)
Senior Unsecured Regular Bond/Debenture Sep 1, 2019, Downgraded to Caa2 (LGD5) from Caa1 (LGD5)
Senior Secured Bank Credit Facility Mar 08, 2018, Assigned at B3 (LGD3)
Outlook, Changed To Stable from Negative
The downgrade reflects implementation of Laureate’s aggressive debt-financed growth plans that have increased the company’s leverage to levels no longer supportive of a B2 rating, while weakening the company’s liquidity profile due to increased reliance on its revolving credit facility. On June 30, 2015, the company announced that it had entered into an agreement with lenders to amend its revolving credit agreement, which would have terminated in June 2016, to extend the maturity to March 8, 2018. By extending the maturity, Laureate has been able to avert significant refinancing risk over the near term as nearly $300 million of the $350 million facility was drawn as of March 31, 2015. However, the amendment will increase the amount of debt maturing in 2018 (over $2 billion of term loan and revolver) that presents a sizeable refinancing challenge.
Since March 31, 2014, Laureate has invested approximately $677 million in acquisitions and capital spending (gross, before proceeds from sale of assets) to support its growth plans, while total student enrollment has grown by nearly 20%. While enrollment growth is a positive, it has constrained the company’s liquidity as evidenced by revolver borrowings that are well above recent historical averages with nearly $108 million in incremental borrowings year over year and average availability below 20% during the last four quarters.
Laureate’s total debt (including Moody’s standard adjustments) now stands at approximately $5.9 billion as of March 31, 2015, and leverage, as measured by debt to EBITDA, is estimated at 6.3 times (including pro forma results for acquisitions) for the March 2015 LTM period. Other credit metrics are similarly more in line with a B3 rating: pro forma EBITA to interest is estimated at 1.1 times, while retained cash flow to debt is below 10%. The company has a history of generating earnings from growth investments to stabilize and modestly reduce leverage, but it will be a challenge to reduce leverage materially over the near term due to the scale of current growth plans and risks inherent in the company’s wide range of operations internationally. Moreover, because of the company’s global breadth, Laureate’s earnings are subject to substantial foreign exchange exposure.
However, the rating is supported by the company’s prominent market position in the international for-profit, post-secondary education space, substantial diversity due to the broad geographic scope of service offerings worldwide, favorable industry fundamentals, and generally supportive educational policies in countries in which Laureate operates, which should support positive enrollment trends. In addition, because the company operates primarily outside of the US, it does not face the same regulatory pressures relating to Title IV funding that negatively affects many US-based for-profit education providers. Nonetheless, Moody’s believes the company faces substantial political risk on campuses outside of the US, as any changes in policies promulgated by authorities overseeing post-secondary education could have a material impact on the company’s operations.
Moody’s assesses Laureate’s liquidity condition as adequate. The company carries substantial cash balances ($430 million as of March 31, 2015), although only $83 million is held in the US. This amount reflects seasonal working capital swings, and is expected to increase over the course of the year, approaching levels reported at year-end 2014 (approximately $200 million), which is important considering the company’s substantial US dollar debt service requirements. Because of high levels of investments, free cash flow is expected to be negative through 2015, as it was in 2014, which could pressure cash reserves. To some extent the company can rely on the sale of unencumbered assets, such as real estate, as an alternative source of liquidity that mitigates the substantially negative free cash flow. Laureate maintains a $350 million revolving credit facility which is being amended to extend its maturity until March 2018. However, with the significant portion of this facility drawn as of March 31, 2015, only approximately $57.5 million was available to the company as a secondary source of liquidity. The company also maintains credit facilities outside of the US, aggregating approximately $100 million, which is used to cover working capital requirements in many of their non-US operations.
The stable ratings outlook reflects Moody’s expectations that the company will continue to invest to support expansion in its network of universities, which will inhibit rapid deleveraging or a return to a stronger liquidity profile over the near term. Moody’s also expects that the company will maintain its current liquidity condition, with strong cash balances that provide support to seasonal cash flow needs or a modest deterioration in operating performance.
The ratings could be lowered if the company experienced a weakening in enrollments, or if the company cannot successfully implement integration plans under its current growth strategy, possibly resulting in weaker liquidity or further increases in debt to support operations. Specifically, a downgrade could be warranted if debt to EBITDA exceeds 7.5 times for a prolonged period, if EBITA to interest is sustained below 1 time, or if total cash balance fall below $200 million without significant improvement in committed revolver availability.
Ratings could be raised if the company’s earnings and cash generated from operations allow for substantial debt reduction and improvement in liquidity. Specifically, the company would need to substantially restore revolver availability while generating positive free cash flow (before consideration of proceeds from asset sales). Credit metrics sustained at the following levels would support higher rating consideration: debt to EBITDA sustained below 6.0 times, EBITA to interest in excess of 1 times, and retained cash flow to debt above 10%.
The principal methodology used in these ratings was Business and Consumer Service Industry published in December 2014. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on http://www.moodys.com for a copy of these methodologies.
Laureate is based in Baltimore, Maryland, and operates a leading international network of accredited campus-based and online universities with 89 institutions in 29 countries, offering academic programs to approximately 1,037,000 students through over 200 campuses and online delivery. Laureate had revenues of approximately $4.4 billion for the LTM period ended March 31, 2015.