London, 12 October 2020 -- Moody's Investors Service, ("Moody's") has
today downgraded the corporate family rating ("CFR") 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, to B3
from B2. Moody's additionally downgraded the company's probability
of default rating to B3-PD from B2-PD and the company's
$750 million guranteed senior secured term loan B due 2026,
$900 million senior secured notes due 2026 and $200 million
guaranteed senior secured revolving credit facility due 2025 to B3 from
B2. The rating outlook has been changed to stable from negative.
RATINGS RATIONALE
The decision to downgrade the ratings reflects Moody's expectation
that the company's credit ratios will remain outside of the target
range identified to maintain a B2 rating for at least 12 months.
This is primarily the result of the negative effects of the coronavirus
pandemic on the economic environment in the UAE, and in Dubai in
particular.
This academic year, GEMS will operate with fewer students for the
first time in more than 10 years, as fewer expatriate students registered
from overseas, and as parents postponed the entry in the school
system of children aged below five. The suspension of some of the
company's support services and extra-curricular activities
will lead to a decline in EBITDA in the academic years ending August 2020
and August 2021. At the same time, Moody's sees limited
prospects for growth due to unfavorable population trends and the cap
on tuition fee increases in Dubai set by the local regulator.
The coronavirus outbreak, the government measures put in place to
contain it, and the weak global economic outlook continue to disrupt
economies and credit markets across sectors and regions. Although
an economic recovery is underway, it is tenuous and its continuation
will be closely tied to the containment of the virus. As a result,
the degree of uncertainty around Moody's forecasts is unusually
high. Moody's regards the coronavirus outbreak as a social risk
under its ESG framework, given the substantial implications for
public health and safety.
In August 2020, GEMS incurred $150 million of additional
debt through the placement of private notes. This will add to an
already high stock of debt estimated at $2.6 billion and
it will further weaken the company's gross leverage and interest
coverage metrics.
Moody's calculates that the combined effect of these events will result
in GEMS' gross debt to EBITDA (using Moody's adjustments) staying above
8x through academic year ending August 2021, more than a turn beyond
the downgrade trigger for the B2 rating set at 7x. The company's
free cash flow is likely to remain negative until academic year ending
August 2021. GEMS' leverage should gradually return below 8x through
August 2022, provided enrolments recover and normal school activities
resume.
Moody's considers that GEMS has sufficient liquidity to meet its financial
obligations in the next 12 months and to support any temporary operating
volatility. Positively, liquidity has been strengthened by
the recent $150 million private placement. The company continues
to benefit from a strong competitive position in the UAE and strong revenue
visibility from committed student enrolments. Moody's estimates
$380 million of cash and cash equivalents as of 31 August 2020
and $120 million available under its $200 million guaranteed
senior secured revolving credit facility maturing in 2025. Cash
from operations of around $115 million for the next 12 months will
contribute to cover around $120 million of capital spending (including
IFRS16 lease payments), $9 million of short-term debt
maturities and $32.5 million of dividend payments.
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 Moody's
is not aware of any issues related to GEMS' schools.
RATING OUTLOOK
The stable outlook reflects Moody's expectation that the company's
leverage will gradually decline within Moody's rating guidance for
a B3 rating through August 2022. The stable outlook also reflects
GEMS' good liquidity.
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 7x, free cash flow becomes positive,
and liquidity is maintained at an adequate level.
Conversely, the ratings could be downgraded if Moody's-adjusted
debt/EBITDA fails to decline below 8x, if free cash flow remains
negative for a prolonged period, or if liquidity weakens.
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 65 schools across the UAE (46), UK (17) and
Qatar (2) teaching c. 126 thousand students as of 31 May 2020.
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 $391
million in the twelve months to 31 May 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.
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Mikhail Shipilov
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service Limited, Russian Branch
7th floor, Four Winds Plaza
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Russia
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Mario Santangelo
Associate Managing Director
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