OREANDA-NEWS. S&P Global Ratings today revised its outlook on Netherlands-incorporated private provider of higher education, Global University Systems Holding BV (GUS), to negative from stable. At the same time, we affirmed our 'B+' long-term corporate credit rating on the company.

We also affirmed our 'B+' issue rating on GUS' senior secured debt issued by its subsidiary Lake Bridge International PLC. The '3' recovery rating on this debt remains unchanged, reflecting meaningful recovery prospects in the higher half of our 50%-70% range for creditors in the event of a payment default.

We also affirmed our 'BB' issue rating, with a '1' recovery rating (90%-100% recovery in the event of a payment default), on the group's ?15 million super senior revolving credit facility (RCF).

The outlook revision primarily reflects our opinion of a more aggressive financial policy than we expected previously, especially with regard to debt-funded acquisitions. The company has recently put in place a ?50 million bridge loan to finance its external growth while the full amount of its ?15 million RCF is drawn now for the working capital needs. Additionally, the sale-and-leaseback of University of Law (Ulaw) buildings, which was agreed upon by its previous owners, came into effect in the fiscal year ended Nov. 30, 2015, and has led to an increase in our adjusted debt by about ?126 million. We now anticipate S&P Global Ratings' adjusted debt to EBITDA (leverage) of between 4.5x and 5.0x, compared with the less than 4.0x we forecast last year for fiscal 2016. This gives limited headroom under the current 'B+' rating. Finally, the group's board-approved commitment to reduce and maintain net reported leverage below 2.0x in 2017 has now been pushed back to fiscal 2018 and beyond.

We continue to assess GUS' business risk profile as weak, reflecting our view of the group's limited geographic diversification outside the U. K., and its somewhat limited scale and operations in a small market. The U. K. market for undergraduate and postgraduate offerings primarily consists of public education providers, with only 3% of undergraduates and 9% of postgraduates taught by private higher education institutions. We also factor in the group's exposure to government funding and regulation. Our view of possible integration risks should the company pursue an acquisition-based growth strategy in the future is another restricting factor. At the same time, we are not aware of any concrete acquisition plans at this time. However, we view positively the undergoing integration of Ulaw and the renewal and transferred of its university title, Taught Degree-Awarding Powers (TDAP), course designation, and U. K. Visas and Immigration (UKVI) under the group's regulated activities.

We believe that the group's strong brands and established relationships with accrediting bodies and other regulators, as well as its TDAP and university title following the Ulaw acquisition, will enable the group to maintain a leading market position in the growing private higher education market in the U. K. We also view favorably the group's diversification in terms of disciplines and student domiciles, reducing its exposure to the economic cycle and regulatory changes. Lastly, we think that the group's brands, flexible timetables, and digital capabilities will enable it to retain and attract students, providing some degree of visibility on revenues.

The aggressive financial risk profile reflects GUS' S&P Global Ratings' adjusted debt to EBITDA of between 4.5x-5.0x in 2016 and 2017 under our base case, including our assumption of potential acquisitions. The current capital structure comprises the ?234.4 million senior secured bond issued last year to finance the Ulaw acquisition, the ?15 million fully drawn RCF, and a ?50 million bridge loan recently put in place to finance further acquisitions. Our adjusted debt figures also include about ?126 million of operating leases following the sale-and-leaseback transactions in fiscal 2015 and earlier.

The negative outlook reflects our expectation that GUS' leverage will increase toward 5.0x in 2016, incorporating the effect of the sale-and-leaseback transactions, and an increase in acquisition-related debt. Therefore, there is limited headroom under the current 'B+' rating, and we consider that a more aggressive financial policy, or operational underperformance against our base case, could lead us to downgrade GUS in the next 12 months.

We could lower the ratings if the group's operational performance weakens, or if GUS undertook further debt-funded acquisitions, such that adjusted FFO to debt falls below 12% or adjusted debt to EBITDA rises above 5x. We could also lower the rating if free operating cash flow (FOCF) weakens or turns negative, or if we believed that management's financial policy had become more aggressive.

We could revise the outlook to stable if GUS performs at least in line with our base case, such that EBITDA and FOCF increased at a healthy rate in 2016 and 2017. A stable outlook would also require us to believe that financial policy was sustainably supportive.