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Rating Action:

Moody's assigns first-time B2 CFR to Grandir; outlook stable

12 Oct 2021

NOTE: On October 19, 2021, the press release was corrected as follows: The last sentence of the LIQUIDITY section was corrected to “The company will have a long debt maturity profile with the RCF maturing in March 2028 and the TLB in September 2028.” Revised release follows.

Madrid, October 12, 2021 -- Moody's Investors Service ("Moody's") has today assigned a first-time B2 corporate family rating (CFR) and a B2-PD probability of default rating (PDR) to The Education Group SAS (Grandir), the holding company within the restricted group that will own Grandir SAS, a leading French-based international provider of child care and early education. Concurrently, Moody's has assigned a B2 rating to the €350 million first lien senior secured term loan B (TLB) due September 2028 and the €75 million first lien senior secured revolving credit facility (RCF) due March 2028, both borrowed by The Education Group SAS. The outlook is stable.

On July 19, 2021, funds managed by Infravia Capital Partners (InfraVia) signed an agreement to acquire Grandir for a total consideration of around €800 million. Shortly after, on July 27, 2021, Grandir announced that it had entered into exclusive negotiations to acquire Sodexo's child care business, Liveli, for a total consideration of around €200 million. The acquisitions will have a sizeable equity contribution from InfraVia along with significant reinvestment from Grandir's founder and Sodexo. The equity contribution, together with the proceeds from the TLB, will be used to (1) fund the combined enterprise value consideration of around €1,000 million; (2) provide a cash over-funding of €20 million, and (3) pay transaction costs of €24 million.

"The B2 rating reflects Grandir's resilient busines model and good industry demand dynamics supported by a favorable regulatory environment and tax regime mainly in France, its largest market," says Víctor García Capdevila, a Moody's Vice President -- Senior Analyst and lead analyst for Grandir.

"However, the rating also factors in Grandir's high leverage, the execution risks associated with its rapid and ambitious organic and inorganic growth strategy, and its limited free cash flow generation," adds Mr. García.

RATINGS RATIONALE

Grandir's B2 CFR reflects (1) the positive industry demand dynamics of the child care and early education business with supply-demand imbalances in countries like France, Germany, Canada or the United States; (2) its solid business model supported by a degree of revenue visibility from long term contracts with corporates and municipalities; (3) the favorable regulatory environment, particularly in France, where the company generates around 70% of consolidated revenues; (4) its resilient operating performance in economic downturns and during the pandemic; (5) its growing international diversification in a selected number of countries with supportive child care policies and limited customer concentration; (6) the large equity injection from the sponsor, representing about 66% of the total acquisition price; and (7) the potential for synergies from the combination with Liveli.

However, the rating is constrained by (1) the company's high leverage post-transaction, with Moody's-adjusted gross leverage of 6.0x before lease adjustments (4.5x after lease adjustments) on a proforma basis; (2) risks of potential adverse changes in the regulatory landscape, particularly in France, although this is mitigated by the long track record of the current regulatory and tax incentives framework; (3) lower profitability margins compared to peers mainly because of the acquisition of Liveli which is margin dilutive; (4) potential for near term performance to be affected by lower birth rates caused by the pandemic, although it is mitigated by the structural deficit of seats in France and other key markets; (5) pricing pressures in the business-to-business segment led by an intensification of the competitive environment; (6) execution risks associated with a rapid and ambitious inorganic growth strategy and the expansion into new countries where the operating environment might not be as favorable as in France; and (7) modest free cash flow generation.

Moody's estimates that Grandir's revenue will grow by mid-single digit in 2022 to €570 million driven by new nurseries and the ramp up of openings in previous years. Moody's estimates the company's EBITDA margin will increase slightly in 2022 to 22% (2021:21.6%), driven mainly by a higher absorption of headquarter and support functions costs, leading to an EBITDA in 2022 of around €125 million (2021: €119 million).

Moody's base case scenario assumes slightly negative free cash flow generation of around €3 million in 2021 and only modest positive FCF of about €10 million in 2022. In the absence of debt funded M&A, Moody's estimates that leverage could reduce to 5.6x in 2022 and 4.9x in 2023, before lease adjustments, and to 4.3x and 4.0x, respectively, after lease adjustments.

However, given the highly fragmented nature of the early child care education industry coupled with Grandir's proven appetite and track record of inorganic growth, the company is highly likely to engage in further debt funded acquisitions.

ENVIRONMENTAL, SOCIAL AND GOVERNANCE (ESG) CONSIDERATIONS

Moody's has factored into its assessment the following social and governance considerations.

Social considerations are related to demographic and societal trends, as well as human capital. These are characterized mainly by increased female participation in the workforce, changes in demographics and changes in parents' preferences towards early education as opposed to pure care. These trends support the positive industry dynamics of the child care and early education segment.

Human capital is also a social consideration in Grandir's rating because one of its biggest challenges is the shortage of staff. Personnel expenses represent around 65% of the company's total operating costs. High personnel turnover rates or wage inflation could negatively affect the company's operating and financial performance.

From a corporate governance perspective, Moody's highlights the high leverage of the company, which is consistent with its majority private equity ownership structure. Private equity firms tend to have more tolerance for leverage and risk and comparatively are less transparent than publicly listed companies. In addition, the company has a track record of rapid inorganic growth. Moody's also positively notes that the founder remains in the shareholding structure and will continue as the group's CEO.

LIQUIDITY

Moody's views Grandir's liquidity as adequate. Cash balances at closing are expected to be around €20 million, further supported by the availability under the undrawn €75 million revolving credit facility (RCF). The RCF is subject to a consolidated senior secured net leverage springing covenant of 9.1x when drawings exceed 40%. Moody's expects comfortable headroom under this covenant over the next 12-18 months.

Moody's expects limited FCF generation in 2021 and 2022, although intra-year working capital swings of around €15 million, owing to the payment profile of social security grants, may lead to temporary drawings under the RCF.

The company will have a long debt maturity profile with the RCF maturing in March 2028 and the TLB in September 2028.

STRUCTURAL CONSIDERATIONS

Grandir's probability of default rating of B2-PD reflects the use of an expected family recovery rate of 50%, as is consistent with all first lien covenant-lite capital structures.

The €350 million TLB and the €75 million RCF are rated B2, in line with the company's CFR. All facilities are guaranteed by the company's subsidiaries and benefit from a guarantor coverage of not less than 80% of the group's consolidated EBITDA. The security package includes shares, bank accounts and intercompany receivables of material subsidiaries.

The shareholder loan provided by Infravia and due 6 months after the final debt maturity of the TLB has received equity credit under Moody's methodologies.

RATIONALE FOR STABLE OUTLOOK

The stable outlook reflects the resiliency of the business model, the positive industry dynamics and Moody's expectation of a slight reduction in leverage over the next two years in the absence of debt funded acquisitions.

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

Upward pressure on the ratings could develop over time if Moody's-adjusted gross debt to EBITDA declines below 4.5x before lease adjustments or 3.5x after lease adjustments and the company demonstrates a track record of generating material positive free cash flows, leading to a FCF/Net debt ratio higher than 10%.

Conversely, downward pressure on the ratings could arise if earnings deteriorate or the company engages in debt financed acquisitions leading to Moody's-adjusted gross debt to EBITDA sustainably above 6.0x before lease adjustments or 4.5x after lease adjustments. Downward rating pressure could also arise if the company's free cash flows are sustainably negative or its liquidity profile deteriorates.

LIST OF AFFECTED RATINGS

Assignments:

..Issuer: The Education Group SAS

....LT Corporate Family Rating, Assigned B2

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

....Senior Secured Bank Credit Facility, Assigned B2

Outlook Actions:

..Issuer: The Education Group SAS

....Outlook, Assigned 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.

COMPANY PROFILE

Grandir is a leading international provider of child care and early education for infants and children under the age of six years, with around 40,000 seats and 967 nurseries in 7 different countries. The group has operations in France (70% of revenue in 2021PF), North America (13%), UK (10%), Germany (6%), Spain (1%) and India (1%). The business model is predominantly focused on business-to-business (45% of revenue in 2021PF) followed by business-to-customer (30%) and business-to-government (25%). In 2020, the group reported revenue of €273 million and EBITDA of €45 million (before lease adjustments). In 2021, including Liveli, revenue and EBITDA are expected to be around €550 million and €60 million respectively.

Following the transaction, the share capital of the group will be owned by funds managed by Infravia Capital Partners (58%), the founder & CEO (22%), Sodexo (19%) and the rest of the management team (1%).

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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288435.

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 UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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.

Victor Garcia, CFA
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Ivan Palacios
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Espana, S.A.
Calle Principe de Vergara, 131, 6 Planta
Madrid 28002
Spain
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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