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Related Issuers
Rating Action:

Moody's affirms GEMS' B2 ratings; changes outlook to negative

20 Apr 2020

London, 20 April 2020 -- Moody's Investors Service, ("Moody's") has today affirmed the B2 ratings of GEMS MENASA Cayman Ltd (GEMS), a provider of kindergarten to 12th grade (K-12) private-pay education in the Middle East and the UK. At the same time, Moody's has changed the rating outlook to negative from stable.

Full details of the rating actions can be found at the end of this press release.

RATINGS RATIONALE

The decision to change the outlook to negative from stable reflects the risks that lockdown measures designed to limit the spread of the coronavirus could extend beyond August 2020. The grant of means-tested discounts and the suspension of support services and extra-curricular activities will negatively affect GEMS' revenue, EBITDA and cash flow generation in the year ending August 2020, and could jeopardize the company's deleveraging trajectory if they extend beyond that date.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. More specifically for GEMS, the economic strain caused by the coronavirus outbreak will lead to lost revenues from discounts on tuition fees, from the suspension of support services and extra-curricular activities, and delays in the collection of tuition fees.

The affirmation of the ratings reflects Moody's view that the company has sufficient liquidity to support temporary operating volatility and that its credit metrics will rapidly recover if normal operating conditions resume in September 2020. The negative outlook incorporates our expectation that leverage will remain outside our rating guidance for the year ending 31 August 2020. The negative outlook assumes schools in the UAE will reopen in September 2020 with no enrollment losses.

GEMS continues to benefit from a strong competitive position in the UAE and strong revenue visibility from committed student enrolments. However, the company's already high leverage provides less flexibility to maneuver in the current environment. Moody's calculates that GEMS' gross debt to EBITDA (using Moody's adjustments) will reach 8.0x for academic year ending August 2020, which is beyond the downgrade trigger set at 7.0x. However, GEMS' leverage could return below 7.0x by August 2021 if schools in the UAE reopen in September 2020 with no negative impact on enrolments. Under such a scenario, GEMS would remain weakly positioned in the B2 rating category for the next 12-18 months.

GEMS' has sufficient liquidity to meet its financial obligations in the next 12 months. The company benefits from $130 million of cash and cash equivalents as of 29 February 2020 and $200 million under a revolving credit facility maturing in 2025. Cash from operations of around $175 million for the next 12 months will be sufficient to cover around $100 million of capital spending (including IFRS16 lease payments), $25 million of short-term debt maturities and $25 million of dividend payments. Moody's estimates that the company will temporarily require around $40 million of additional working cash because of shortfalls in the collection of tuition fees.

Education is one of the sectors identified by Moody's as facing high social risk. The rising demand for quality education in emerging markets is supported by rising disposable income amongst middle class, as well as persistent supply/demand imbalances in the public education system as demand for highly rated schools ordinarily outstrips supply. Compliance with local regulations is critical in the sector and we are not aware of any issues at GEMS' schools.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The ratings could be upgraded if Moody's-adjusted debt/EBITDA declines and is sustained below 6x, and if free cash flow to debt is sustained above 5%, while maintaining an adequate liquidity profile.

Conversely, the ratings could be downgraded if Moody's-adjusted debt/EBITDA fails to decline below 7x, if free cash flow to debt reduces towards zero, or if liquidity weakens. Further, the ratings could be downgraded if lockdown measures continue to negatively affect GEMS' operations by September 2020 or in case of student enrollment losses for the academic year starting in September 2020.

LIST OF AFFECTED RATINGS

Affirmations:

..Issuer: GEMS MENASA Cayman Ltd

....Corporate Family Rating, Affirmed B2

....Probability of Default Rating, Affirmed B2-PD

....BACKED Senior Secured Bank Credit Facility, Affirmed B2

....Senior Secured Regular Bond/Debenture, Affirmed B2

Outlook Actions:

..Issuer: GEMS MENASA Cayman Ltd

....Outlook, Changed To Negative From Stable

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Business and Consumer Service Industry published in October 2016 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1037985. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

GEMS MENASA Cayman Ltd (GEMS) is a provider of kindergarten to 12th grade (K-12) private-pay education in the Middle East. GEMS owns and operates 63 schools across the UAE (46), UK (14), Qatar (2), and Switzerland (1) teaching c. 127 thousand students. GEMS was founded in Dubai in 1968 by the Varkey family, who still owns 66% of the company. Its schools generated revenues of $1.1 billion and Moody's-adjusted EBITDA of $373 million in the twelve months to 29 February 2020.

The local market analyst for this rating is Thomas Le Guay, +971 (423) 795-45.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
21 1st Tverskaya-Yamskaya St.
Moscow 125047
Russia
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Mario Santangelo
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE APPLICABLE MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

​
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