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American Public Education, Inc. -- Moody's assigns B1 CFR to American Public Education; outlook stable

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Rating Action: Moody's assigns B1 CFR to American Public Education; outlook stableGlobal Credit Research - 09 Mar 2021New York, March 09, 2021 -- Moody's Investors Service, ("Moody's") assigned a B1 Corporate Family Rating (CFR) and B1-PD probability of default rating (PDR) to American Public Education, Inc. (APEI). Concurrently, Moody's assigned B1 ratings to the company's proposed $20 million senior secured first lien revolver due 2026 and $175 million senior secured first lien term loan B due 2027. Moody's also assigned APEI a SGL-1 speculative grade liquidity rating, indicating very good liquidity. The outlook is stable. This is the first time Moody's has rated APEI.Net proceeds from the new debt issuance along with cash on hand and $29 million of preferred stock will be used to fund the $329 million acquisition of Rasmussen University (Rasmussen) and to pay transaction costs. Rasmussen is one of the largest privately-held healthcare-focused universities offering associate's, bachelor's, master's, and doctoral degrees to over 18,000 students through 24 campuses across 7 states and online. Though nursing and health sciences account for the bulk of its $256 million revenue for its fiscal year ended September 30, 2020, Rasmussen also offers programs in business, education, justice studies, technology, and design.The transaction is expected to close in the July-September 2021 quarter, subject to approvals from the Department of Education (DOE), Higher Learning Commission, regulatory authorities and other closing conditions. The ratings are subject to the transaction closing as proposed and receipt and review of the final documentation.Assignments:..Issuer: American Public Education, Inc..... Corporate Family Rating, Assigned B1.... Probability of Default Rating, Assigned B1-PD.... Speculative Grade Liquidity Rating, Assigned SGL-1....Senior Secured 1st Lien Revolving Credit Facility, Assigned B1 (LGD3)....Senior Secured 1st Lien Term Loan B, Assigned B1 (LGD3)Outlook Actions:..Issuer: American Public Education, Inc.....Outlook, Assigned StableRATINGS RATIONALEAPEI's B1 CFR reflects the company's good financial performance through its two subsidiary institutions, American Public University System, Inc. (APUS) and Hondros College of Nursing (HCN), modestly low leverage, and strong cash flow generation. APUS provides affordable online postsecondary education to adult learners and is the leading provider of higher education to the military and veterans. Despite annual net course registration and student enrollment declines from 2014 to 2019, APUS realized modest growth in 2020 during the coronavirus pandemic, supported by the market shift to online learning, particularly among active military students. Enrollment at HCN, an accredited provider of postsecondary education to nursing professionals, increased due in part to successful marketing investments, a surge in demand for nursing education, and a change in the competitive environment due to coronavirus.The rating is constrained by the company's small scale and limited geographic diversity, APUS's high concentration and reliance of active military and veterans, and substantial regulatory requirements for operating for-profit higher education businesses. APUS is particularly reliant on the Department of Defense's (DoD) tuition assistance program and the DoD's budget, and the variability of military activity makes it difficult to predict APUS's future enrollments. The rating also reflects integration and execution risks associated with the Rasmussen acquisition. This is the company's first large-scale acquisition (HCN was acquired in 2013 and generated about $30 million in annual revenue at the time) with Rasmussen expected to comprise about 44% of the combined company's pro forma 2020 annual revenue.The combined company will become the leading provider in pre-licensure nursing and have a more diversified enrollment base across nursing, adult learning and military. Pro forma for the transaction, Moody's estimates that Moody's adjusted leverage (which accounts for Rasmussen's operating lease liabilities using Moody's standard adjustment for operating leases) is 3.3x for the LTM period ended September 30, 2020. The company has the ability to de-lever via free cash flow generation and Moody's expects that leverage will decline to 3x by FYE2021 and approach 2.5x by FYE2022. Moody's notes that ASC 842 lease accounting treatment will likely result in a lower on-balance sheet liability for Rasmussen's operating leases compared to Moody's current calculation using Moody's standard adjustment to operating leases. This may result in Moody's projected leverage estimates being further reduced by a range of .5x to .7x. Moody's also expects free cash flow as a percentage of debt (Moody's adjusted) to approach 19% by FYE2022, strong for the B1 CFR.The SGL-1 rating reflects Moody's expectation that liquidity will be very good over the next 12 to 18 months. APEI had $228 million of cash as of September 30, 2020. Pro-forma for the Rasmussen acquisition and the $86 million net proceeds from the common stock equity raise that closed on March 1, 2021, Moody's estimates cash balances to be about $184 million. Mandatory debt payments on its new term loan B will be $8.75 million per year. Including $2.6 million of annual preferred stock dividends, Moody's forecasts at least $25 million of free cash flow over the next 12 months. The company's new $20 million revolving credit facility expires in 2026, and Moody's does not expect APEI to draw on its revolver over the next 12 months. The revolver and term loan are expected to contain a maximum total net leverage ratio covenant set at 30% cushion with further stepdowns. Alternate liquidity is limited as the company's credit facilities are secured by a first-priority lien on substantially all tangible and intangible assets.Under Moody's ESG framework, the company has some social risks. APEI derives a significant portion of its revenue from government-assisted aid in many jurisdictions, and the company must comply with laws, regulations, and accreditation measures in each jurisdiction in which it operates. In particular, APUS students utilize various payment sources and programs to finance their educational expenses, including but not limited to funds from the DoD, tuition assistance programs, education benefit programs administered by the U.S. Department of Veterans Affairs (VA), and federal student aid from Title IV programs. Reductions in or changes to DoD tuition assistance, VA education benefits, Title IV programs, and other payment sources could have a significant impact on APEI's operations. As of September 30, 2020, approximately 60% of APUS students self-reported that they served in the military on active duty at the time of initial enrollment. Active duty military students generally take fewer courses per year on average than non-military students. Also, enrollments and course registrations by active duty service members may be adversely affected by a variety of factors not directly related to education programs, including changes in military activity and budgets.Moody's also regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Given APEI'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. Somewhat offsetting these social risks are the social benefits associated with APUS's education services primarily being offered online, enabling new and current students to continue their education despite the coronavirus outbreak. Also, the coronavirus outbreak has cast a spotlight on nursing, driving increased interest in an industry that has an ongoing supply-demand imbalance for nursing professionals.The B1 rating on APEI's senior secured first lien credit facilities reflects both the Probability of Default rating of B1-PD and the loss given default assessment of LGD3. The senior secured first lien credit facilities benefit from the secured guarantees from all existing and subsequently acquired domestic subsidiaries. As there is no other meaningful debt in the capital structure, the facilities are rated in line with the B1 CFR.Preliminary terms in the company's first lien credit agreement indicate that APEI can incur incremental facilities up to the greater of $91 million and 100% of adjusted EBITDA as defined over the prior four fiscal quarter period, plus an additional amount so long as it is not greater than: 0.50x above the closing date first lien net leverage ratio for pari passu secured debt, or in the case of junior secured debt, 0.75x above the closing date secured net leverage ratio, or in the case of unsecured debt, either 1.0x above the closing date total net leverage ratio or the interest coverage ratio on a pro forma basis is not less than 2.0x (or, if used to finance a permitted acquisition or permitted investment, such ratio tests may be satisfied so long as leverage does not increase or interest coverage does not decrease on a pro forma basis). Amounts up to the greater of $91 million and 100% of adjusted EBITDA may be incurred with an earlier maturity date than the term loan facility. Only wholly owned subsidiaries must provide guarantees, raising the risk that guarantees may be released following a partial change in ownership, subject to restrictions only permitting releases if such guarantor ceases to be a restricted subsidiary as a result of a transaction permitted under the financing documentation or becomes an excluded subsidiary but which will not refer to becoming a non-wholly-owned subsidiary. Asset transfers to unrestricted subsidiaries are permitted, subject to "blocker" provisions that restrict transfers of material intellectual property to such unrestricted subsidiaries. In the event of an asset sale, a 100% proceeds prepayment applies with step-downs at 50% and 0% based on achieving reductions to the closing date first lien net leverage ratio of 0.25x and 0.5x, respectively.The above are proposed terms and the final terms of the credit agreement can be materially different.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe stable outlook reflects Moody's expectation that APEI will continue to grow in revenue, generate positive free cash flow, and successfully integrate Rasmussen into its operations.Given the company's small scale and limited geographic diversity, an upgrade is unlikely in the near term. However, the ratings could be upgraded if APEI increases its scale and geographic diversity significantly, maintains strong student enrollment growth, sustains Moody's adjusted leverage below 2x, and sustains free cash flow to debt (Moody's adjusted) above 20%.APEI's ratings could be downgraded if Moody's adjusted leverage is sustained above 3x, if enrollments meaningfully decline, its liquidity position meaningfully deteriorates, or if the company encounters any substantial challenges in integrating Rasmussen with its operations. A downgrade may also be warranted if unanticipated regulatory challenges result in sizeable litigation expenses, ineligibility for Title IV funding or the removal of accreditation to one of the company's learning institutions.Headquartered in Charles Town, West Virginia, American Public Education, Inc. is a provider of educational services and operates 5 campuses in Ohio, one campus in Indiana, and online. Revenue totaled $322 million for the last twelve months ended December 31, 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 DISCLOSURESFor 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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Sean Cray Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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