Approximately $594 million of rated debt impacted
New York, September 14, 2020 -- Moody's Investors Service, ("Moody's") placed
Adtalem Global Education Inc.'s ("Adtalem" or
the "company") Ba3 Corporate Family Rating (CFR), B1-PD
Probability of Default Rating (PDR) and Ba3 senior secured ratings on
review for downgrade following the company's recent announcement
that it has entered into a definitive agreement to acquire Walden University
("Walden") from Laureate Education for approximately $1.48
billion in cash. The company's SGL-1 Speculative Grade Liquidity
rating remains unchanged.
Following is a summary of today's rating actions:
Ratings On Review for Downgrade:
Issuer: Adtalem Global Education Inc.
.....Corporate Family Rating,
Placed on Review for Downgrade, currently Ba3
.Probability of Default Rating, Placed on Review
for Downgrade, currently B1-PD
.$300 Million Senior Secured First-Lien Revolving
Credit Facility due 2023, Placed on Review for Downgrade,
currently Ba3 (LGD3)
.$300 Million ($294 Million outstanding)
Senior Secured First-Lien Term Loan B due 2025, Placed on
Review for Downgrade, currently Ba3 (LGD3)
Outlook Actions:
....Outlook, Changed To Rating Under
Review From Stable
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE
OF THE RATINGS
The review was triggered by Adtalem's agreement to purchase Baltimore,
MD-based Walden University, a leading online healthcare education
provider offering bachelor's, master's and doctoral degrees
to more than 53,000 students across all 50 states and over 160 countries.
Walden is the leading nursing school in the US and specializes in graduate
degree programs. Though healthcare and behavioral sciences account
for the bulk of its approximate $600 million in annual revenue,
Walden also offers programs in management, technology and education.
The $1.48 billion purchase price values the business at
a pre-synergies multiple of approximately 8.4x LTM 6/30/20
EBITDA (6.2x post-synergies). Adtalem has arranged
$2.05 billion of committed financing (i.e.,
$1.65 billion first-lien term loan B and senior secured
notes and $400 million revolving credit facility), which
will be used with cash balances to fund the purchase price and repay its
existing credit facilities. With pro forma gross debt increasing
nearly sixfold, Moody's projects the transaction will elevate
Adtalem's financial leverage above the 2.75x downgrade threshold
to around 4.3x total debt to EBITDA (Moody's adjusted,
pro forma for the inclusion of Walden's LTM EBITDA) from 2x as of
30 June 2020. Should the combined company demonstrate an ability
to sustain leverage close to the 4x area through the cycle, Moody's
expects that any downgrade of Adtalem's CFR is likely to be limited
to one notch. To the extent the existing credit facilities are
fully repaid and extinguished at closing, Moody's will withdraw
those instrument ratings.
The transaction is expected to close in the July-September 2021
quarter (Adtalem's first quarter of fiscal 2022), subject
to approvals from the Department of Education (DOE), regulatory
authorities and other closing conditions. Given the lengthy examination
by the DOE and regulators, Moody's expects to conclude the
review at or near the timing of the transaction close or debt raise.
Moody's review will focus on the: (i) pro forma financial
leverage and future cash flow generating capacity of the combined company,
as well as the financial and capital allocation policies and medium-term
financial targets; (ii) complementary nature of the Walden asset
with Adtalem's medical and healthcare education business and how
Walden will position Adtalem to capture the expected growth in nursing
education and online learning markets; (iii) business profile of
the combined company in terms of operational diversity, degree mix,
program mix and geographic reach; (iv) integration and execution
risks associated with the acquisition; (v) regulatory risks,
including the increased dependence on Title IV funding and expected deterioration
of Adtalem's financial responsibility score as a result of the acquisition;
(vi) timing for realization of potential cost synergies arising from the
Walden integration as well as revenue synergies between the two companies
and plans to improve operating margins in the financial services segment;
and (vii) combined entity's liquidity with respect to free cash
flow generation given the higher interest expense burden from the increased
debt load and potential uses of free cash flow for the resumption of share
repurchases.
Adtalem's credit profile considers the company's strong market position
and solid historical financial performance within its for-profit
medical and healthcare education segment while operating in a challenging
higher education regulatory environment and actively pursuing M&A
opportunities. As a result of the coronavirus pandemic and economic
recession, the company is also facing certain operating restrictions
that have impacted in-person live conferences and suspended clinical
rotations as well as the potential to slow student enrollment growth.
Over the last several years, the company has repositioned its portfolio
of schools by divesting non-core assets and acquiring faster growth
education assets in areas such as healthcare, continuing and professional
education (e.g., anti-money laundering,
compliance, finance and accounting) and online learning.
Moody's believes the Walden acquisition will enhance Adtalem's
scale, strengthen its graduate and post-graduate degree mix,
increase program diversification and bolster the fast-growth medical
and healthcare segment, particularly in the area of nursing where
the combined company will be a #1 or #2 provider across a spectrum
of nursing programs. The acquisition will also increase Adtalem's
online offerings and capabilities, chiefly in health sciences,
which could be a material competitive advantage during the coronavirus
outbreak. While the company expects to achieve roughly $60
million of run-rate cost synergies in the second year after close,
one-time cash costs to achieve future cost savings are also projected
at $60 million, which will offset realized savings over the
short-run, limiting cash EBITDA growth.
Though Adtalem has successfully integrated past acquisitions, the
Walden purchase represents the company's largest acquisition to
date and poses certain integration and execution risks due the transformative
nature and scope of the transaction. Given Walden's size
and its declining enrollment trends over the past several years,
combined with heightened regulatory risks and increased financial leverage
associated with the transaction, the acquisition could present bandwidth
challenges for management and divert attention from the existing portfolio,
potentially increasing operational performance risk that could lead to
volatile credit metrics and/or delayed deleveraging.
Moody's expects Adtalem will maintain very good liquidity (SGL-1
Speculative Grade Liquidity) over the next 12 months supported by sizable
cash balances (cash totaled $501 million at 30 June 2020) and solid
free cash flow generation. The company's existing $300
million revolver ($231.6 million available) is expected
to remain in place until the transaction closes.
The rapid spread of the coronavirus outbreak, deteriorating global
economic outlook, low oil prices, and high asset price volatility
have created an unprecedented credit shock across a range of sectors and
regions. Moody's regards the coronavirus outbreak as a social
risk under our ESG framework, given the substantial implications
for public health and safety. Given Adtalem's exposure to
the US and overseas economies as well as consumer spending, the
company remains vulnerable to restrictions imposed on its operations and
shifts in market demand and consumer sentiment in these unprecedented
operating conditions.
Given the review for downgrade, an upgrade is highly unlikely over
the near term. Prior to the downgrade review, the factors
that could lead to a downgrade include: (i) higher financial leverage
sustained above 2.75x (Moody's adjusted); (ii) substantial
challenges of any potential acquired asset integration; (iii) sustained
enrollment declines or operating profit deterioration in the medical and
healthcare segment (Adtalem's largest segment); or (iv) unanticipated
regulatory challenges that could result in sizeable litigation expenses,
ineligibility for Title IV funding or removal of accreditation.
Ratings could also be downgraded if there is meaningful deterioration
in liquidity.
Headquartered in Chicago, Illinois, Adtalem Global Education
Inc. is a global provider of educational services with a focus
on Medical and Healthcare and Financial Services. The company operates
seven educational institutions across the US and Caribbean. Revenue
totaled just over $1 billion for the fiscal year ended 30 June
2020.
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.
Gregory A. Fraser, CFA
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
