Nord Anglia serves up old-school LBO

Asian leveraged finance markets are chewing through a US$231.3m leveraged buyout backing the acquisition of London-listed educational services provider Nord Anglia, in what will be the first LBO from the education sector from Asia.

Although Nord Anglia is headquartered in the UK, the decision to target lenders in Asia is simple: the financing has Asian links in that Nord Anglia operates primarily in Asia and the financial sponsor buying it is the Asian arm of Baring Private Equity Partners.

The strength of those links will be tested as original mandated lead arranger and bookrunner Credit Suisse attempts to sell down the debt to lenders in the region. Fortunately, the Swiss bank is already sitting pretty with four commitments at the top through AMP Capital Investors, Barclays, Mizuho Corporate Bank and UOB Asia.

AMP and Barclays are said to have come into the US$47.7m seven-year junior tranche, while Mizuho and UOB have joined as equal status arrangers on the US$133.6m senior secured tranche.

The US$133.6m senior secured tranches is split equally into a six-year amortising term loan A and a 6-1/2-year bullet term loan B. There are also two additional undrawn tranches: a US$40m 6-1/2-year capex tranche and a US$10m 6-1/2-year revolver.

Those familiar with the financing said the mezzanine debt had already been fully subscribed with no further need to bring in more investors. Rival bankers, however, found it hard to believe that the mezz tranche was covered particularly as it pays unattractive returns of around Libor plus 10% comprising a cash coupon of 450bp over Libor in cash and 550bp over Libor through a PIK note.

With institutional investors unlikely to be attracted to any financing paying returns lower than the high teens, some believe Nord Anglia’s mezz tranche features an equity kicker for investors that must be boosting the returns.

The term loan A, the capex tranche and the revolver pay margins of 300bp over Libor, while the term loan B pays 325bp.

Credit Suisse, Mizuho and UOB are expected to syndicate the senior debt to less than a handful of lenders with strong relationships with the financial sponsor. With the junior tranche already fully subscribed that should not be a huge challenge even though the transaction represents a rare borrowing from the education sector.

Potential lenders will have to gain an understanding of the business, which is different from the traditional bricks-and-mortar that lenders are typically used to in Asia.

Nord Anglia provides educational services through two divisions: the international schools division that operates nine schools under the British International Schools brand, and the learning services division that provides contractual education services to public schools in the UK and the Middle East.

Of the nine British International Schools, four are in China, one is in South Korea and four more in Eastern Europe. Together the nine schools have a capacity for 7,300 students, 5,000 of whom will be in Asia.

The fact that the underlying business does not have any hard assets and lenders will largely rely on cashflows to service the debt is a hurdle potential lenders will have to overcome. Nord Anglia derives half of its revenues from Asia and the Middle East. One of the concerns lenders will raise is the ability to upstream dividends from the operations in China.

The asset-light nature of the business will also not find favour with a section of lenders in the region that have grown up on a diet of asset-based lending.

The financing does have its share of positives. The business generates stable, diversified cashflows that are highly predictable.

The LBO features leverage (total debt-to-Ebitda) on the drawn facilities at around 4.7 times based on the pro forma Ebitda of US$38m for the year ending August 31 2008.

It might appear on the higher side, but the senior debt represents a leverage of 3.5 times, while that on the junior tranche is at 1.2 times. Ebitda margins are not very high though at 20% for the company with the schools division accounting for the bulk of earnings.

Baring Private Equity Asia’s equity contribution of about 31% of the £190m (US$336m) acquisition price is almost close to the size of the senior debt tranches. The takeover represents an Ebitda multiple of 8.84 times and is Baring’s second attempt at buying out the company after being rebuffed by the management in June when it made an offer of about £180m.