Lernen Bidco Ltd. Rated 'B-'; Outlook Stable; £471 Million Equivalent First-Lien Debt Upgraded To 'B'

  • Lernen Bidco Limited, (a financing subsidiary of education company, Lernen Bondco PLC, operating as Cognita), has successfully placed €255 million of second-lien debt and used the proceeds to repay shareholder loans along with part of the group's first-lien debt.
  • We are assigning our 'B-' long-term issuer credit rating to Lernen Bidco Limited, the entity at which the future consolidated accounts of the group will be prepared.
  • We are also raising our issue rating on Lernen Bidco's first-lien bank loan debt (current outstanding amount of £472.3 million equivalent, compared with the initial £555.8 million) to 'B' from 'B-'.
  • The stable outlook reflects our view that Lernen Bondco (Cognita) will reduce leverage gradually, albeit modestly--with adjusted debt to EBITDA remaining well above 5x--once its new capacity comes on-stream, absent any material debt-financed acquisitions or shareholder returns. In addition, we expect persisting negative free operating cash flows in the fiscal year 2019 during the growth phase.
LONDON (S&P Global Ratings) Feb. 1, 2019--S&P Global Ratings said today that 
it took the rating actions outlined above. The upgrade of Lernen Bidco's 
first–lien debt follows the announcement that it has repaid a portion of the 
first-lien debt from the proceeds of the £225 million equivalent second-lien 
bank debt (not rated). 

The proceeds of the new €255 million (£225 million equivalent) second-lien 
facility were used to repay about €95.85 million of first-lien debt, and the 
remaining proceeds to repay part of the shareholder loan from the Jacobs 
family and a revolving credit facility. This transaction does not affect our 
rating or outlook on Cognita as we already took this refinancing into account 
in Nov. 30, 2018 when the Jacobs family extended a temporary shareholder loan 
of about €159 million. (see "Lernen Bondco Plc (Cognita) Proposed £225 Mil. 
Equivalent Senior Unsecured Notes Rating Withdrawn On Cancelled Issuance" 
published on RatingsDirect). Post-transaction, we expect S&P Global 
Ratings-adjusted debt to EBITDA to remain close to 9.0x in the fiscal year 
2019, improving toward 7.5x in 2020. This is in line with our expectation when 
we assigned our 'B-' long-term issuer credit rating to Lernen Bondco Plc "see "
Lernen Bondco Plc, New Parent Of Private Schools Group Cognita, Rated 'B-'; 
Outlook Stable," published Nov. 16, 2018").

The stable outlook reflects our view that Cognita will sustain at least 10% 
revenue growth annually, fueled by organic growth and acquisitions, in the 
next 12 months. We expect Cognita's adjusted EBITDA margin will gradually 
improve toward 24% by 2020 thanks to diversification into higher-margin 
markets and operating leverage benefits from recent investments. We believe 
that the company's gradual deleveraging will result in its adjusted debt to 
EBITDA staying well above 5x. This is once it realizes improved utilization of 
additional capacity from the greenfield projects, absent any material 
debt-financed acquisitions or shareholder returns. In addition, we expect free 
operating cash flow (FOCF) to remain materially negative in fiscal 2019 during 
the growth phase.

The stable outlook also incorporates our anticipation that Cognita will 
maintain adequate liquidity by reducing its discretionary capital expenditure 
(capex) spending if operating performance is weaker than we currently expect.

We could lower the rating on Cognita if its operating performance weakened 
materially below our projections. This could result from the group's inability 
to improve its capacity utilization or increase fees at least in line with its 
costs, and would translate into lower revenue growth than we currently 
incorporate in our projections. Operating underperformance could lead to an 
unsustainable capital structure, which could lead us to downgrade Cognita. We 
could also take a negative rating action if capex overruns lead to negative 
FOCF for an extended period, or if the group exhibits a more aggressive 
financial policy, for example, as a result of another round of large 
debt-funded acquisitions, greenfield projects, or shareholder returns. In 
addition, we could lower the rating if the group's liquidity weakened.

We could upgrade Cognita if its performance materially exceeded our base-case 
assumptions and it substantially reduced leverage to an S&P Global Ratings' 
adjusted debt-to-EBITDA ratio of well below 7.5x or lower, while EBITDA 
interest coverage improved to 2.0x. An upgrade would also hinge on our view 
that the group would be able to generate and sustain sizable positive FOCF.