Moody’s has downgraded its outlook on GEMS Education to negative to reflect the risk that Covid-19-linked lockdown measures could “jeopardise” the firm’s strategy to lessen its debt burden.

In a statement issued on 20 April, the global ratings agency affirmed its B2 rating – which considers obligations rated as such to be speculative and subject to high credit risk – of GEMS, but changed its rating outlook on the company to negative from stable.

“The decision to change the outlook to negative from stable reflects the risks that lockdown measures designed to limit the spread of the coronavirus could extend beyond August 2020,” said Moody’s. “The grant of means-tested discounts and the suspension of support services and extra-curricular activities will negatively affect GEMS' revenue, EBITDA and cash flow generation in the year ending August 2020, and could jeopardise the company's deleveraging trajectory if they extend beyond that date.”

Moody’s decision delivers a fresh blow to the United Arab Emirates’ largest for-profit school operator, which in recent weeks has found itself embroiled in bitter spats with parents seeking fee rebates and has been accused of creating fake Twitter accounts to promote a “false” positive brand image.

The agency’s downgraded outlook highlights the financial plight of private schools – even multi-billion-pound incumbent operators – amid a ruthless pandemic that has resulted in economic turmoil and impacted the ability of parents to keep up with tuition fee payments. It suggests that premiums paid by GEMS on loans could increase in the near future. 

Moody’s said that the “rapid and widening spread of the coronavirus outbreak” has led to economic deterioration, which, in turn, has created a “severe and extensive credit shock across many sectors, regions and markets”.

The agency’s affirmation of GEMS’ B2 rating “reflects Moody’s view that the company has sufficient liquidity to support temporary operating volatility and that its credit metrics will rapidly recover if normal operating conditions resume in September 2020. The negative outlook incorporates our expectation that leverage will remain outside our rating guidance for the year ending 31 August, 2020. The negative outlook assumes schools in the UAE will re-open in September 2020 with no enrolment losses.”

GEMS – whose gross debt, according to Moody’s, will reach eight-times its EBITDA this year – tapped the bond market last year to raise $900 million. The notes, which mature in 2026, offered a yield of 7.125%.

“GEMS continues to benefit from a strong competitive position in the UAE and strong revenue visibility from committed student enrolments,” said Moody’s. “However, the company's already high leverage provides less flexibility to manoeuvre in the current environment.

“GEMS' leverage could return below 7.0x by August 2021 if schools in the UAE reopen in September 2020 with no negative impact on enrolments. Under such a scenario, GEMS would remain weakly positioned in the B2 rating category for the next 12-18 months.”

GEMS has sufficient liquidity to meet its obligations in the next 12 months, said Moody’s, as the company benefits from $130 million of cash and cash equivalents, and $200 million under a revolving credit facility maturing in 2025.

But Moody’s estimates that GEMS will need around $40 million of additional working cash to cover “shortfalls in the collection of tuition fees”.

The agency continued: “Education is one of the sectors identified by Moody's as facing high social risk. The rising demand for quality education in emerging markets is supported by rising disposable income amongst middle class, as well as persistent supply/demand imbalances in the public education system as demand for highly rated schools ordinarily outstrips supply.”