Primary Preview: Nord Anglia Education’s Lack of Hedging and Regulatory Risks More Than Offset by Strong Track Record, Dominant Market Position, Growth Prospects, Diversification and Pricing Power

Nord Anglia Education’s proactive $1.9 billion-equivalent cross border transaction to term out its maturities through a partial amend-and-extend and refinancing is generating strong support among buysiders. The global education group faces some potential regulatory risks as well as foreign exchange risks as a result of an unhedged mismatch in terms of its debt and earnings, but these are more than offset by its strong track record in terms of growth as well as academic success, global scale and diversification, clear pricing power and supportive sponsors, sources said.

Under the deal, Nord Anglia’s existing around €1.5 billion first lien term loan B will be extended to January 2028, its existing $409 million second lien term loan will be extended to September 2028 and it will raise a new $500 million term loan B tranche due January 2028 to repay part of its existing first lien debt.

The existing RCF has been upsized to $545 million and extended to August 2027 with the group’s relationship banking group. Nord Anglia will have $481 million of cash on the balance sheet, leaving it with plenty of firepower to continue consolidating the market, sources noted.

Pro forma net leverage for the transaction will be 4.5x based on consolidated adjusted EBITDA of $434 million for the year to August 2022, which implies around 2x of deleveraging from the 6.5x level when sponsors EQT and CPPD acquired Nord Anglia in 2017. The EBITDA figure is fairly clean with just $29 million of addbacks, sources said. Based on Nord Anglia’s budgeted fiscal 2023 consolidated adjusted EBITDA of $488 million, net leverage would come down to 3.8x.

The group has a strong track record with uninterrupted student enrolment growth at around 22.6% CAGR since 2008, which has translated into its topline more than tripling from $475 million at the time of its IPO in 2014 to $1.544 billion in its fiscal 2022. EBITDA grew from $128 million to $434 million over the same period.

The company is the global market leader in the K-12 education segment with 81 schools, leaving it well diversified geographically, and the highest level of profitability by a wide margin. Despite its strong growth since its IPO, Nord Anglia still only has a 3% share of the global market, which remains highly fragmented with 92% still represented by single schools or regional groups, leaving substantial scope for growth. It is adding a high single digit number of schools every year, one buysider noted.

As a result, Nord Anglia expects to continue growing revenue at around 8% CAGR over the next five years from $1.723 billion expected in fiscal 2023 to $2.355 billion in fiscal 2027. EBITDA is expected to grow from $488 million to $800 million over the same period.

The group also has a strong track record of delivering academic results, with roughly half its students accepted by the world’s top 100 universities, which is up from roughly a third in 2020. That creates a considerable barrier to entry, given that it would take a long time for any new competitor to try and replicate, another buysider noted.

Nord Anglia also benefits from a high level of visibility with an average student tenure of around 4.5 years and over 95% persistence rates, while it typically manages to push through price increases exceeding inflation by around 1.5x-2x, offsetting concerns around labor cost inflation, buysiders said.

In addition, the group also has supportive sponsors with BPEA, EQT and CPP Investments having provided an additional $400 million of equity for acquisitions since they took Nord Anglia private in 2017, sources said.

Furthermore, the deal is highly cash generative. For fiscal 2023, Nord Anglia forecasts generating around $438 million of cash EBITDA. It expects around $47 million of working capital inflows as a result of tuition prepayments and to spend $74 million on cash taxes, $100 million on capital expenditure (of which roughly $38 million is growth capex) and around $200 million on cash interest, which suggests it will generate close to $110 million of free cash flow.

The free cash flow generation works out to around 6% of net debt and is forecast to increase to 10% the following year and 18% by 2027, which is a pretty good story, another buysider said. Nord Anglia is expecting net leverage to fall from 3.8x at the end of its fiscal 2023 to just 1x by 2027.

Regulation Risk

The biggest concern for investors is regulatory risk, especially in China given that the group was previously impacted by the Chinese government’s decision to ban direct foreign ownership of private schools, which resulted in Nord Anglia losing control of its Chinese bilingual schools and having to operate as a service provider receiving fees instead. However, the EBITDA contribution from the bilingual segment jumped as a result of the switch to service fees, which has offset the level of the asset write-down over time, while at roughly $33 million EBITDA expected in fiscal 2023 the potential loss of the earnings would be manageable, buysiders noted.

Nord Anglia’s Chinese schools for international students, which mainly cater for expats, should receive a tailwind from China’s post Covid re-opening. Geopolitical risk, such as a potential war with Taiwan, could mean that Nord Anglia would face losing its entire China business, which could push up leverage back past the 6x level, however the the total group deserves a roughly 12x EBITDA multiple valuation, so lenders would still be money good, one buysider added.

The other main risk is that Nord Anglia does not hedge exchange rate risk despite issuing over 70% of its debt in euros while generating just 5% of its earnings in euros, buysiders said. However, management has actively managed this risk successfully in the past, they added.

Nord Anglia accelerated the commitment deadline to 5 p.m. GMT on Tuesday, Jan. 24, and revised price talk to 97.5-98 OID on the euro tranche and 98 on the dollar tranche with margins at Euribor/SOFR+475 bps versus a 97 OID and margins in the Euribor/SOFR+475 bps to Euribor/SOFR+500 bps range previously.

That looks fair given the deal’s B2 from Moody’s and B rating from S&P, with the OID broadly in line with where the group’s loans were trading before the transaction was announced, buysiders agreed.

Nord Anglia’s capital structure is below:
 
EMEA Covenants has analyzed Nord Anglia’s loan documentation. For a copy of our analysis or to speak to our legal analyst, contact us HERE.

– Robert Schach