Laureate Education, Inc. (NEW) -- Moody's assigns B1 CFR, Ba3 first-lien debt rating to Laureate upon return of capital indication; outlook stable

Rating Action: Moody's assigns B1 CFR, Ba3 first-lien debt rating to Laureate upon return of capital indication; outlook stableGlobal Credit Research - 11 Feb 2022$910 million of newly rated debtNew York, February 11, 2022 -- Moody's Investors Service, Inc. ("Moody's") assigned ratings to Laureate Education, Inc. (NEW) ("Laureate"), including a B1 corporate family rating (CFR) and a B1-PD probability of default rating, upon the for-profit higher-education provider's announcement that it will be making a debt-financed distribution to its shareholders. Moody's also assigned Ba3 instrument ratings to both an existing $410 million, first-lien, senior secured revolving credit facility expiring in late 2024 and a new, $500 million, first-lien, senior secured term loan maturing in early 2029. Proceeds from the new term loan will be used for a return of capital to shareholders, either through dividends or share repurchases, and to satisfy an estimated $14 million in transaction fees and expenses. Moody's has also assigned a speculative grade liquidity rating of SGL-1, reflecting the publicly traded company's very good liquidity. Laureate's outlook is stable.The proposed debt-funded distribution points to aggressive financial strategy that the company, still significantly private-equity owned despite its public company status, is willing to employ. Governance considerations are therefore a driver of this ratings action. Additionally, given an expected easing of social restrictions and its favorable impact on students returning to campus, Moody's views social considerations as a driver of this action as well.The following ratings/assessments are affected by today's action:New Assignments:..Issuer: Laureate Education, Inc. (NEW).... Corporate Family Rating, Assigned B1.... Probability of Default Rating, Assigned B1-PD.... Speculative Grade Liquidity Rating, Assigned SGL-1....Senior Secured 1st Lien Term Loan, Assigned Ba3 (LGD3)....Senior Secured 1st Lien Revolving Credit Facility, Assigned Ba3 (LGD3)Outlook Actions:..Issuer: Laureate Education, Inc. (NEW)....Outlook, Assigned StableRATINGS RATIONALELaureate's B1 CFR reflects the company's improved leverage and operational focus as the result of using proceeds from asset divestitures over the past several years to pay down debt. With nearly $1.1 billion in annual revenue, the company now provides its higher education programs and services to students though its licensed universities and higher education institutions in Mexico and Peru only. The $500 million of incremental term loan debt will more than double the company's pro-forma Moody's-adjusted debt-to-EBITDA leverage, to nearly 3.1 times as of year-end 2021, which is moderate for the B1 ratings category. And the EBITDA calculation itself employs extensive add-backs that are a function of the sweeping restructuring of the company over the years; there are addbacks for heavy losses on debt extinguishment, asset impairment writedowns, financial derivative losses and foreign exchange gains, and for an ongoing excellence in process (EiP) program to adjust for, for example, severance expenses and lease cancellation expenses that have been incurred over the years. Moody's expects a meaningfully more stable, streamlined operating platform over the next 12 to 18 months, and a dramatic decline in EiP adjustments as well, such that the poor quality of earnings that weighs on the ratings will improve. The rating also considers moderate risk stemming from emerging markets and mismatched currency.Laureate now focuses on the developing markets of Mexico and Peru, which contribute equal amounts to its sizable, $1.1 billion revenue base. In these markets, a private, non-government-supported payment model accounts for 97% of tuition payments. The company historically demonstrated solid enrollment growth in its institutions, which have come under pressure due to the coronavirus outbreak. Student enrollments fell in 2020 by 8%, while revenue fell 15%, with a reversal in 2021, when enrollment rebounded by 15%, and revenues 6%. As society emerges from the health pandemic, Moody's believes Laureate will see enrollment growth again in 2022. Higher enrollment, inflation-adjusted pricing, and expanding capacity and utilization rates of Laureate's hybrid education model should lead to mid-single-digit revenue growth this year.Reputation risk is highly relevant to the education sector, and to for-profit institutions in particular since an event that would undermine the educator's reputation as an institution could harm the company's operating metrics. Legal and regulatory challenges, if not remedied, can present increased risk of operational deterioration if specific institution licenses are withdrawn. Nevertheless, the company must balance its duties to shareholders and profits with its duties to students looking for a marketable degree and future job placement. The B1 rating reflects Laureate's exposure to these legal, regulatory, and practical challenges in the context of the company's operations in a complex industry across two distinct jurisdictions.Moody's assesses Laureate's liquidity as very good, as reflected in the SGL-1 speculative grade liquidity rating. The company has carried unusually large cash balances in recent years, largely as a result of asset sales. Cash at December 31, 2021 was $325 million. A very large, $410 million revolving credit facility, a holdover from when Laureate was a $4.0 billion-revenue company, continues to be undrawn. Given its streamlining through asset sales, Laureate has a diminished ability to resort to the sale of unencumbered assets, such as real estate, as an alternative source of liquidity, as it has in the recent past. Still, cash reserves, full revolver access, and covenant flexibility support our strong liquidity assessment, while free cash flow is subdued given heavy expenditures for leases for the company's extensive physical infrastructure.The stable outlook reflects Moody's expectations for mid-single-digit revenue growth over the next 12 to 18 months, corresponding with an improvement in student enrollments, while financial leverage moderates to below 2.5 times. Given high Moody's-adjusted capital lease spending for an expanding infrastructure, free cash flow will be modest for the B1 CFR, in the mid-single-digit percentages. But given a strong starting point, balance sheet cash will build and absent further dividends, remain very healthy relative to the funded debt burden.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if the company can sustain moderate revenue growth and margin improvement while maintaining at least good liquidity, the latter supported by free cash flows that, as a percentage of debt, are sustained above 5%. Moody's would also expect an improvement in earnings quality and a demonstrated commitment to restrained financial strategy with regard to acquisitions and additional returns of shareholder capital.The ratings could be downgraded if the company experiences weakening enrollments, if Laureate cannot successfully improve its operating margins while continuing to manage foreign currency risk, or if free cash flow deteriorates, resulting in weaker liquidity. A downgrade could also be warranted if debt-to-EBITDA exceeds 4.0 times for a sustained period, or if the company engages in aggressive debt-funded growth or in recurring large shareholder distributions.The principal methodology used in these ratings was Business and Consumer Services published in November 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1287897. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Laureate is based in Miami, Florida and operates a leading network of five accredited universities in Mexico and Peru offering academic programs to approximately 389,000 students at over 50 campuses and online delivery. Moody's expects Laureate to generate 2022 revenue of roughly $1.15 billion, a better than 5% increase over anticipated 2021 revenue.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. 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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 http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1288235.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. Kevin Stuebe Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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