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Rating Action:

Moody's downgrades GEMS' ratings to B3; stable outlook

12 Oct 2020

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.

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

Releasing Office:
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No Related Data.
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