Dubai's Gems Education assigned 'B' rating with stable outlook, S&P says

Schools provider has ebitda margins of about 30% to 35% and good cash-flow visibility, rating agency says

Gems Education has been assigned a stable outlook by S&P Ratings. Victor Besa / The National
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Standard & Poor’s Global Ratings assigned Dubai's Gems Education a preliminary "B" rating with a stable outlook based on good-cash flow visibility, its large-scale operations and profitability above that of other school operators.

The new rating assignment reflects earnings before interest, taxes, depreciation and amortization (ebitda) margins of about 30 to 35 per cent, S&P said in a report on Sunday. The outlook shows S&P's view of stable ebitda margins, positive free operating cash-flow generation and an adjusted debt-to-ebitda ratio of 6.5 times to 7 times in 2020.

"The stable outlook reflects our view that Gems will maintain its strong market position in the UAE educational space ... supported by the increasing capacity utilisation in the maturing schools and growth in support services." the rating agency said.

Gems Education, which owns and operates 49 schools in the Arabian Gulf, said last week that a consortium led by private equity firm CVC Capital Partners agreed to acquire a 30 per cent stake in the company from existing shareholders.

In May, Gems and Saudi investment firm Hassana Investment Company teamed up to buy the kingdom's biggest private school operator Ma’arif Education Group. Ma'arif runs national and international schools across the kingdom with more than 22,000 students enrolled.

S&P's "B" rating of Gems Education and the company's secured first-lien loan and bond is six notches below investment grade.

The preliminary rating reflects the company's large scale, with more than 120,000 students, its position as the largest school operator in Dubai and above-peer profitability.

It takes into account the company's "highly leveraged" financial risk profile with an adjusted debt-to-ebitda ratio of about 7.5 times in the fiscal year ending August 31, 2019 after Gems Education's proposed refinancing.

Gems launched a refinancing programme, including loans and bonds, that is expected to close by the end of this month, it said last week.

The company is meeting banks in London and New York this week to discuss refinancing worth $1.65 billion (Dh6.05bn), Reuters reported. Its refinancing includes a $850 million loan, $50m in secured bonds and euro-denominated bonds worth $300m.

"The preliminary rating is supported by our expectation of continued strong operating performance and positive cash-flow generation from fiscal 2019, following a sharp reduction in capital expenditure compared with previous years," the report said. "We also assume the company will not embark on aggressive debt-funded acquisitions - this should support deleveraging to below 7 times in the coming years."

S&P said the proceeds from the proposed refinancing will be used to repay the existing $1.25bn of financial debt, fund the acquisition of the UK school group Bellevue for about $85m, pay dividends of $115m, and for transaction fees.

The stable outlook also stems from Gems' focus on the affordable pricing segment and scale in Dubai's education market, which is likely to support stable earnings and cash flow generation in the future, S&P said.

The agency could lower its rating if the company adopts a more "aggressive" financial policy such as debt-financed acquisitions, higher-than-expected dividends or increased capital expenditure, it said.

S&P said there is "limited likelihood" of an upgrade over the next 12 months.