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Rating Action:

Moody's assigns Caa2 CFR to Lakeland Tours, LLC; outlook stable

24 Sep 2020

New York, September 24, 2020 -- Moody's Investors Service, ("Moody's") assigned the following ratings to Lakeland Tours, LLC (d.b.a. "WorldStrides"): Caa2 Corporate Family Rating ("CFR"), Caa2-PD Probability of Default Rating, B1 instrument rating to the new Priority Exit Facility, B2 instrument rating to the new Second Out Take-Back Term Loan and Caa2 instrument rating to the new Third Out Take-Back Term Loan. The credit facilities represent the exit facilities for WorldStrides following it's expected emergence from Chapter 11. The company filed for Chapter 11 on July 20, 2020 as a result of the fallout from the COVID-19 pandemic that severely curtailed global travel, which caused revenue to drop significantly. The outlook is stable.

WorldStrides expects to emerge from bankruptcy on or around September 30, 2020. The company filed a pre-packaged plan and is emerging with $204 million less secured debt and $130 million less total debt from its pre-petition capital structure. The exit facilities include: 1) up to $110 million Priority Exit Facility; 2) $150 million (excluding $3 million in interest accrued while in bankruptcy) Second Out Take-Back Term Loans and 3) $200 million Third Out Take-Back Term Loans. The capital structure upon emergence will also include $200 million of Holdco Notes (not rated) and $108 million of common equity. The exit credit facilities are all first lien facilities, although the Second Out Take-Back Term Loans and Third Out Take-Back Term Loans are subject to carve outs for the Priority Exit Facility and Second Out Take-Back Term Loans (in the case of the Third Out Take-Back Term Loans). The exit facilities tranches also differ according to pay-out priority.

Assignments:

..Issuer: Lakeland Tours, LLC

.... Corporate Family Rating, Assigned Caa2

.... Probability of Default Rating, Assigned Caa2-PD

....Senior Secured Priority Exit Facility, Assigned B1 (LGD1)

....Senior Secured Second Out Take-Back Term Loans, Assigned B2 (LGD2)

....Senior Secured Third Out Take-Back Term Loans, Assigned Caa2 (LGD4)

Outlook Actions:

..Issuer: Lakeland Tours, LLC

....Outlook, Assigned Stable

RATINGS RATIONALE

The Caa2 Corporate Family Rating ("CFR") reflects WorldStrides' highly leveraged capital structure and our expectation that Debt/EBITDA will continue to remain extremely high as the company continues to navigate operating challenges stemming from COVID-19 travel disruptions. In addition, free cash flow to debt will remain weak over the next 12-24 months as a result of the incremental burden from higher debt balances from the payment-in-kind ("PIK") portion of the exit facilities and high interest expense. Revenue will also remain pressured over the next 12-18 months since we do not expect international travel to return to pre-COVID levels within that time period. We expect demand for educational travel programs to remain significantly below pre-COVID levels for the spring travel period next year when historically most of WorldStrides' trips happen. Our ratings are subject to review of final documentation governing the facilities.

WorldStrides' highly levered financial profile is mitigated by its strong business profile -- the company is one of the leading providers of full service domestic and international travel and education services with a well-known brand presence. WorldStrides' teacher advocate network provides the company a way to maintain brand presence in schools and thus support retention for its programs. The company also has a well-diversified customer base with broad geographical footprint and programs that span the K-12, undergraduate and graduate classes, and a track record of having successfully integrated acquired businesses. On the cost side, the company's market position provides the ability to negotiate favorable rates with numerous airlines, coach lines and hotels, which could help extract certain cost savings to support margins. WorldStrides also collects deposits on travel itineraries well in advance of service provisioning, which provides some visibility into forward free cash flow generation, in more typical times.

Social and governance risks are key drivers of our ratings assignment. The rapid spread of the coronavirus outbreak and the weak global economic outlook have created an unprecedented credit shock across a range of sectors and regions including sectors that depend on travel. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. WorldStrides remains susceptible to deterioration in credit quality triggered by the coronavirus outbreak given its exposure to the travel sector, which leaves it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions. Governance is also a key consideration given World Strides' private equity ownership. The company is owned by Eurazeo and minority investor Primavera Capital Group. Although not currently permitted under the credit agreement, the company could, in the future, adopt aggressive financial policies when conditions normalize, which includes shareholder distributions and dividends.

The ratings for the individual debt instruments incorporate WorldStrides' overall probability of default, reflected in the Caa2-PD rating, and the loss given default assessments for the individual instruments. The Priority Exit Facility that has a tenor of three years is rated B1, four notches above the Caa2 CFR, and has a loss given default assessment of LGD1. This tranche benefits from the 1st lien collateral coverage and ranks highest in the capital structure in terms of payment priority, which supports the B1 instrument rating. The $150 million Second Out Take-Back Term Loan is rated B2 with a loss given default assessment of LGD2. The B2 rating reflects the second ranking in payment priority and sits junior to the Priority Exit Facility in terms of payment ranking. The $200 million Third Out Take-Back Term Loan is rated Caa2, which is the same as the CFR. This facility has a loss given default assessment of LGD4. The Caa2 rating reflects the relative junior ranking of the facility as compared to the Priority Exit Facility and the Second Out Take-Back Term Loan, as conveyed by its third out payment priority as well as carve outs from the collateral supporting this facility.

Liquidity is tight through this year and for the first half of 2021. The capital structure upon emergence does not have a revolver and liquidity is constrained to cash on the balance sheet only. Free cash flow is negative for FY 2021 ending June and ending cash balance is projected to be $35 million. Under the exit facilities, the company will be subject to a minimum liquidity covenant of $15 million.

There is expected to be a revolver basket that will be pari passu debt with the exit facilities and which can be reduced on a dollar for dollar basis by a $10 million LC basket until the Priority Exit Facility is paid down. Proposed terms also include the ability to do permitted acquisitions, limited to a $20 million size and subject to pro forma minimum liquidity of $25 million, a maximum total net leverage threshold and permitted only if the Priority Exit Facility has been repaid. There is a risk that guarantees can be released if guarantor subsidiaries cease to be wholly owned.

The stable outlook reflects the expectation that revenue for FY 2021 will be higher on a year-over-year basis with travel recovering slightly in the spring 2021 period. We expect that travel troughed in spring 2020 globally and will start to recover, albeit very slowly, starting in the latter half of 2020 and into 2021. Over the next 12-24 months leverage will remain elevated as the total debt balance increases due to the PIK nature of the facilities. FCF to debt is negative in for FY 2021 but improves to approximately 4.8% by the end of FY 2022.

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

The ratings could be downgraded if default risk rises as prompted by a potential distressed exchange of debt or a deterioration in the company's liquidity from a cash burn rate in excess of Moody's expectations.

The ratings could be upgraded if the sector outlook and economic conditions improves, especially if the outlook for domestic and international travel shows sustained improvement. Ratings could also be upgraded if earnings and free cash flow shows growth, leverage falls and liquidity provisions remain adequate.

Headquartered in Charlottesville, Virginia, Lakeland Tours is an accredited educational institution that provides full service educational travel programs to K-12, undergraduate and post graduate students, both domestically and internationally. Lakeland Tours generated revenues of approximately $359 million over the twelve months ended June 30, 2020. The company is owned by Eurazeo and minority investor Primavera Capital Group.

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.

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.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Farah Zakir
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Karen Nickerson
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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