UAE based school operator GEMS MENASA has been downgraded deeper into junk territory to B- from B by S&P due to weakened revenues and lower EBITDA projected for 2021-22. The rating agency said, “We now expect GEMS’ debt to EBITDA will remain high at 7.5x-8.5x in the next 18-24 months, versus our previous expectation of about 7.0x in 2021.” The school operator operates in the premium segment and has considerable enrollments from the expatriate population. S&P expects the leverage of the company to remain high in 2021-22 resulting in a high debt to EBITDA due to the drop in earnings because of the pandemic-induced slowdown, which has resulted in weaker cash flows. The free operating cash flow to debt ratio of the company is very low at 2-3% despite delaying plans to open two new schools and cutting capital expenditure. Pressure will also be caused due to 2-5% lower enrollments compared to last year as there was a general reduction in the expatriate population. The rating agency also noted the uncertainty caused by the second wave of the pandemic globally and acknowledged the rollout of the vaccine in the UAE, which has been the second highest globally (as a percentage of population) while giving the company a stable outlook despite the high leverage. According to the rating agency “there is limited likelihood of an upgrade over the next 12 months.”
GEMS MENASAs 7.125% 2026s were down 0.25 to trade at 104.75 on the secondary market.
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