Lernen Bidco Limited -- Moody's upgrades Cognita's CFR to B3; stable outlook

Rating Action: Moody's upgrades Cognita's CFR to B3; stable outlookGlobal Credit Research - 13 Dec 2021London, 13 December 2021 -- Moody's Investors Service ("Moody's") has today upgraded Lernen Bidco Limited's (Cognita) corporate family rating (CFR) to B3 from Caa1 and probability of default rating (PDR) to B3-PD from Caa1-PD. Concurrently, Moody's has affirmed the B3 instrument ratings of the GBP200 million and EUR494 million senior secured term loans due 2025 and the GBP100 million senior secured Revolving Credit Facility (RCF) due 2025. The outlook on all ratings is stable.RATINGS RATIONALEThe upgrade of Cognita's CFR to B3 from Caa1 with stable outlook reflects Moody's expectation that the group will be able to gradually reduce its Moody's-adjusted leverage towards 8x within the next 12 to 18 months, on the back of strong enrollment growth of nearly 15% achieved at the start of the academic year 2022, as well as fee increases in the mid-single digits in percentage terms that will fuel revenue and EBITDA growth in the fiscal year 2022 ending 31 August 2022.The rating action further reflects Moody's expectation that Cognita will be able to ensure continuity in its students' education, despite further disruption caused by the enduring coronavirus pandemic, by the use of hybrid or fully virtual teaching approaches if needed. As such Moody's expects that Cognita will avoid granting further discounts on its fees, as occurred over the past two years, and will return to solid and sustainable enrollment growth going forward.The B3 CFR further reflects (1) Cognita's position as an established operator in the fragmented K-12 education market, with a geographically diversified portfolio of 86 schools in twelve countries; (2) its good track record of achieving revenue and EBITDA growth through organic and acquisitive student growth and tuition fee increases above cost inflation; (3) the barriers to entry through regulation, brand reputation and a purpose-built real estate portfolio; and (4) the high degree of revenue visibility from committed student enrollments.Conversely, the CFR is constrained by (1) Cognita's relatively aggressive financial policy resulting in high financial leverage and weak free cash flow generation; (2) the concentration risk within the top ten schools accounting for nearly two thirds of group EBITDA; (3) the group's reliance on its academic reputation and brand quality in a highly regulated environment; and (4) its exposure to changes in the political, legal and economic environment in emerging markets.ESG CONSIDERATIONSCognita's ratings factor in certain governance considerations such as the private ownership structure with the majority of shares owned by Jacobs Holding AG and minority shareholder BDT Capital Partners and Sofina. The ratings further reflect Cognita's financial policy which is tolerant of high leverage and a largely debt-funded growth strategy.RATING OUTLOOKThe stable outlook reflects Moody's expectation that Cognita will be able to notably improve its operating performance in fiscal year 2022 and beyond, sustaining the solid enrollment growth achieved at the start of the academic year, which will result in good EBITDA growth and the continued reduction in Moody's-adjusted leverage. The outlook further assumes that liquidity remains adequate and Cognita will successfully complete its key development projects and integrate recent acquisitions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSThe ratings are initially weakly positioned in view of the high leverage and relatively aggressive financial policy, as a result of which limited upward rating pressure is expected. Upgrade pressure on the ratings could occur if Moody's-adjusted Debt/EBITDA sustainably decreases below 7.0x, free cash flow generation turns positive on a sustainable basis, whilst liquidity remains adequate.Downward pressure on the rating could develop if Cognita is not able to grow its revenue and EBITDA on a sustainable basis, Moody's-adjusted Debt/EBITDA fails to decrease towards 8.0x, EBITA/Interest remains below 1.0x or liquidity weakens with limited availability under the RCF and substantially negative free cash flows. Any material negative impact from a change in any of the group's schools' regulatory approval status could also lead to a downgrade.LIQUIDITY PROFILEMoody's considers Cognita's liquidity profile to be adequate. On 30 August 2021 the group had GBP134 million of cash on balance sheet, and Moody's understands that around 50% of these cash balances are held at local operations that in some cases is not readily available to the wider group, although can be repatriated via dividends and used to fund local development projects. The group's liquidity is further supported by its fully undrawn GBP100 million RCF due in 2025.The RCF is subject to a springing net first-lien leverage covenant set at 7.4x, which is tested when the facility is drawn down for more than 40%. At the end of August 2021, the company had sufficient headroom under the covenant and Moody's expect this to continue to be the case going forward.STRUCTURAL CONSIDERATIONSThe B3 instrument ratings assigned to the senior secured first-lien term loan B due 2025, split into tranches of GBP200 million and around E494 million, and the pari passu ranking GBP100 million RCF due 2025 rank in line with the B3 CFR, despite the priority position of these facilities ahead of the E255 million second-lien financing, reflecting the group's very high level of leverage.The security package provided to the first-lien lenders is relatively weak and limited to a pledge over shares, bank accounts and intercompany receivables, as well as guarantees from operating companies (80% guarantor test) and a floating charge provided by the English borrower.PRINCIPAL METHODOLOGYThe 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.CORPORATE PROFILECognita is an established operator in the global private-pay K-12 education market with headquarters in London, United Kingdom. The group operates 86 schools across twelve countries in Europe, Asia, Latin America and the Middle East, offering primary and secondary private education. Founded in 2004, the group has rapidly grown through acquisitions and capacity expansion to over 56,000 students enrolled across its institutions and generated around GBP515 million of revenue during the fiscal year ended of August 2021. The group is majority-owned by Jacobs Holding AG with minority shareholders BDT Capital Partners and Sofina.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. 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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.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. Timo Fittig Analyst Corporate Finance Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Richard Etheridge Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 Client Service: 44 20 7772 5454 Releasing Office: Moody's Investors Service Ltd. 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