TEXT-S&P rates Laureate Education notes 'CCC+'

Tue Jul 17, 2012 5:16pm EDT

Overview
     -- U.S.-based higher-education program provider Laureate is putting in 
place a $300 senior unsecured note due 2019.
     -- The company plans to use proceeds from the new facility to refinance 
the amount outstanding on the revolving credit facility.
     -- We are rating the facility 'CCC+' with a recovery rating of '6', and 
affirming our 'B' corporate credit rating on the company.
     -- The stable rating outlook reflects our view that the company will 
continue to gradually reduce debt leverage over the intermediate term.
 
Rating Action
On July 17, 2012, Standard & Poor's Ratings Services assigned ratings to 
Baltimore, Md.-based Laureate Education Inc.'s $300 million unsecured notes 
due 2019. We assigned the notes an issue-level rating of 'CCC+' (two notches 
below our 'B' corporate credit rating on the company) with a recovery rating 
of '6', indicating our expectation of negligible (0% to 10%) recovery for 
bondholders in the event of a payment default. Laureate will use the proceeds 
to refinance the amount outstanding on the company's existing revolving credit 
facility due 2016 and for general corporate purposes.

At the same time, we affirmed our existing ratings on Laureate, including the 
'B' corporate credit rating. The rating outlook is stable.
 
Rationale
The corporate credit rating reflects Standard & Poor's expectation that 
Laureate's debt leverage will remain high, reflecting the company's 
acquisition orientation. We expect debt leverage to decline slightly to the 
low-6x area by the end of 2012. We view Laureate's business risk profile as 
"weak" based on our criteria, because of the risks inherent in undertaking its 
rapid overseas expansion, which involves considerable execution and country 
risk, in our view. The company has a "highly leveraged" financial profile, in 
our view, because of high debt leverage and modest discretionary cash flow 
generation.

We believe the company intends to continue growing rapidly by making 
acquisitions, entering new countries, and building new campuses over the next 
several years. Laureate's goal, broadly, is to acquire established 
international educational institutions that may have good positions in their 
markets, improve their curriculum, and raise enrollment levels. The company 
periodically acquires underperforming schools operating at low profitability, 
which can depress EBITDA and margins. Laureate earns about half of its 
revenues, and a slightly higher percentage of EBITDA, in Mexico, Chile, and 
Brazil, where postsecondary enrollment is rising faster than in the U.S. 
International schools also face a lower degree of regulation than their U.S. 
for-profit education peers. The company's campuses in the Europe Segment 
account for 13% of revenues. 

We view business execution related to Laureate's rapid growth as a key risk. 
In 2011, Laureate made five tuck-in acquisitions and we expect this trend to 
continue in 2012. The revenue base has continued to expand through 
acquisitions and low-double-digit percent organic enrollment growth. Under our 
base case scenario for 2012, we expect revenue and EBITDA growth to occur at a 
high-single-digit and low-single-digit percent rate respectively, because of 
continued enrollment growth as a result of demand for education overseas. We 
expect the portfolio of international schools to continue to grow, but that 
growth could decelerate slightly in 2013. We expect the EBITDA margin to 
decline over the next 12 months because of cost pressure it experienced in the 
Latin American business in the first half of the year. 

In the seasonally weak first fiscal quarter, revenue rose roughly 8%. EBITDA 
fell 20% because of higher cost requirements from a growth strategy that took 
place in a quarter when classes were out of session in Latin America. This 
timing resulted in higher labor costs to service enrollment growth, higher 
regulatory cost requirements, and higher fixed operating costs year over year.

We expect leverage to remain in the low-6.0x area and coverage to remain in 
the high-1x area in 2012, resulting from EBITDA growth that is partly offset 
by future acquisitions. Credit measures are exposed to volatility in exchange 
rates and country risk because the company generates roughly three-quarters of 
its EBITDA outside the U.S. Debt to EBITDA (capitalizing Laureate's large, 
off-balance-sheet operating lease commitments and including put options held 
by the minority owners in the company's Latin American schools) subsided 
slightly to 6.4x in for the period ended March 31, 2012, from 6.7x at the same 
period last year, as increasing EBITDA more than offset a modest rise in debt. 
Debt leverage, though still high, is lower than the over-8x level at the time 
of the 2007 leveraged buyout. Leverage is in line with our indicative 
financial risk threshold of more than 5x, which we associate with a highly 
leveraged financial profile. EBITDA coverage of interest improved but was 
still low, at 1.7x in the quarter ended March 31, 2012, minimally down from 
1.9x in the same quarter last year due to higher interest expense. 

We expect EBITDA conversion to discretionary cash flow to remain modest over 
the next 12 months, as increased capital expenditures necessary to support 
growth offset growing operating cash flow. The company generated minimal 
discretionary cash flow in 2011 and used almost all cash flow from operations 
for capital expenditures as part of its growth strategy. In the first quarter 
on a last-12-months' basis, discretionary cash flow swung negative because of 
timing of cash taxes paid, higher cash interest expense, and EBITDA declines. 
 
Liquidity
Laureate has "adequate" sources of liquidity, in our view, to cover its needs 
over the next 12 to 24 months, even in the event of moderate unforeseen EBITDA 
declines. Our assessment of Laureate's liquidity profile incorporates the 
following:
     -- We expect the company's sources to cover uses for the upcoming 12 to 
24 months by 1.2x.
     -- We expect net sources to be positive, even with a 20% drop in EBITDA 
over the next 12 months.
     -- We believe headroom under the company's financial covenants could 
withstand a 20% drop in EBITDA.
     -- The company has the capacity to absorb high-impact, low-probability 
shocks over the coming 12 months, in our view.
     -- In our opinion, the company has a generally satisfactory standing in 
the credit markets.
 
Liquidity sources include cash balances of $454.2 million on March 31, 2012, 
roughly $300 of availability under the revolving credit facility pro forma for 
the refinancing, and minimal discretionary cash flow generation. Laureate's 
flexibility benefits from the lack of maintenance financial covenants in the 
U.S. credit agreement. We believe the company is still interested in growing 
through acquisitions, which is likely to keep financial risk high and could 
consume future cash balances.

Debt maturities are nominal in 2012 and $120 million of the pay-in-kind (PIK) 
toggle notes come due in 2013. The remaining $392 million of PIK toggle notes 
and $260 million 10% senior notes mature in 2015. There is a contingent 
maturity of the credit facilities in May 2015 if Laureate does not refinance 
more than $250 million or roughly 33% of the cash coupon and PIK toggle notes 
due Aug. 15, 2015, 91 days prior to their stated maturity and net total 
leverage does not decline from its current level to under 5.0x.
 
Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Laureate to be published as soon as possible following this report.
 
Outlook
The stable rating outlook reflects our expectation that Laureate's debt 
leverage will fall from currently steep levels, and that liquidity will remain 
adequate, provided that acquisitions proceed at a measured pace. We regard an 
upgrade or downgrade as unlikely at this time. We could lower the rating if 
there is a reversal in recent operating trends and discretionary cash flow 
becomes negative on a sustained basis. More specifically, this could occur if 
EBITDA falls by 20% over the next 12 months. Factors that could lead to such a 
decline include a drop in campus-based enrollment, competitive pricing, 
unfavorable exchange-rate fluctuations, an ineffective integration of 
acquisitions, potential economic and political instability in some of the 
countries where the company operates, or, more likely, a combination of these 
factors. An upgrade, which we view as unlikely over the next 12 to 18 months, 
would require the company to meaningfully improve operating performance, 
increase discretionary cash flow, and establish debt leverage below 6x on a 
sustainable basis.
 
Related Criteria And Research
     -- Criteria Guidelines For Recovery Ratings..., Aug. 10, 2009
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
 
Ratings List

Ratings Affirmed

Laureate Education Inc.
 Corporate Credit Rating                B/Stable/--        

Laureate Education Inc.
 Senior Secured                         B                  
   Recovery Rating                      4                  
 Senior Unsecured                       CCC+               
   Recovery Rating                      6                  
 Subordinated                           CCC+               
  Recovery Rating                       6                  

New Rating

Laureate Education Inc.
 Senior Unsecured
  US$300 mil sr unsecrd nts due 2019    CCC+               
   Recovery Rating                      6                  




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