TEXT-S&P rates Laureate Education notes 'CCC+'
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 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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