GEMS' Rating Outlook Hit by Covid-19

As a result of the Covid-19 coronavirus the education group (GEMS MENASA Cayman Ltd (GEMS)) has had its Moody's Investment Services (Moody's) rating outlook moved from stable to negative. The education group's debt could hit eight times its earnings before interest, tax, and depreciation by the end of the school year.
GEMS' Rating Outlook Hit by Covid-19
By David Westley
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GEMS parents wondering if the education group could easily afford further discounts should find its latest investment report of interest.  As a result of the Covid-19 coronavirus the education group (GEMS MENASA Cayman Ltd (GEMS)) has had its Moody's Investment Services (Moody's) rating outlook moved from stable to negative. According to the investment report, the company's high level of borrowing will deteriorate further as a result of the discounts the company is giving to parents. Its earnings are also being hit by the loss of "ancillary" revenues and the late payments of fees.

The education company has, however, retained an overall rating of B2.

According to a media release from the investments ratings company, the decision to change the outlook to negative from stable also reflects "the risks that lockdown measures could extend beyond August 2020..."

"The grant of means-tested discounts, with the suspension of support services and extra-curricular activities will negatively affect GEMS' revenue, earnings and cash flow in the year ending August 2020.

According to the report, the company's debt will reach eight times the size of its earning before interest, tax, and depreciation (EBITDA) by the end of August. The education group generated revenues of $1.1 billion in the twelve months to 29 February 2020, and a Moody's-adjusted EBITDA of of $373 million. 

The company retained its B2 rating because Moody's believes it "has sufficient liquidity to support temporary operating volatility and that its credit metrics will rapidly recover if normal operating conditions resume in September 2020".

GEMS' debt could also return to below seven times its earnings by August 2021, according to Moody's, "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 revenues remain highly dependent on the UAE. It currently owns and operates 63 schools, with 46 of those in the UAE, 14 in the UK, two in Qatar and a single school in Switzerland. The group teaches approximately 127,000 students - less than figures we had reported earlier. The Varkey family still owns 66% of the company.

According to an unconfirmed Bloomberg report published on the 10th April, Sunny Varkey has, however, been looking to sell his majority stake in the company, to raise as much as $200 million, "according to people with knowledge of the matter".

According to the report, Rothschild & Co., the appointed bank for the sale, has "struggled to find any interested parties because of the coronavirus pandemic".

Representatives for both GEMS and Rothschild declined to comment to Bloomberg on the story.

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