Standard & Poor's Ratings Services said that it had lowered its long-term corporate credit rating on Nord Anglia Education Inc. (NYSE: NORD) to 'B' from 'B+'. The outlook is stable. We also lowered our long-term issue rating on the company's guaranteed loans, notes, and revolving credit facility to 'B' from 'B+'. We affirmed our 'cnBB-' long-term Greater China regional scale ratings on the company and its debt.

At the same time, we affirmed our recovery rating on Nord Anglia's existing bank loans at '4H', indicating our expectations are at the upper end of "average" (30%-50%) recovery of the principal in the event of a payment default. Nord Anglia is a Hong Kong-domiciled provider of premium education services with operations across the world.

"We lowered the rating because we expect Nord Anglia's leverage to stay high over the next 12 months due to the company's high debt and subdued profitability," said Standard & Poor's credit analyst Lillian Chiou.

We expect Nord Anglia's debt to stay high because of the company's aggressive debt-funded acquisitions and the inclusion of large and long-dated operating leases from seven out of 10 newly acquired schools. We have also assumed that the company will sell and lease back the remaining three self-owned school premises, and its operating lease-adjusted debt will increase over the next 12 months. We fully adjust these operating leases to calculate the company's debt.

We expect Nord Anglia's leverage will stay materially higher than our upgrade trigger of 6.0x over the next 12 months, although a full recognition of newly acquired schools could bring down the ratio to 7.5x-8.5x from 10.5x as of the fiscal year ended Aug. 31, 2015. We continue to assess Nord Anglia's financial risk profile as highly leveraged.

Nord Anglia's earning power has weakened, in our opinion, although the company's profit margin is still higher than the industry average. Growth in Nord Anglia's profitability could stay subdued as a result of higher costs for newly opened schools in Chicago and Aubonne and faster expansion in lower margin countries such as Vietnam. We also expect the strong U.S. dollar to pressure the company's topline growth. Challenging operating conditions in Nord Anglia's key markets such as China will continue to weigh on the company's operating performance over the next 12 months. As a result, EBITDA margin could decrease to 29%-30% over the period from 32.1% in fiscal 2015. We expect the company's capability to raise tuition fees by 1.5x-2.0x of inflation and potential cost savings after integrating new schools acquired from Vietnam-based British International School Group and Meritas Schools Holdings LLC could partly offset the weaknesses.

We expect Nord Anglia to continue to drive growth through proactive acquisitions given the company's aggressive growth strategy. We believe that any material improvement in the company's financial leverage is unlikely in the next 12 months. Therefore, we have revised our assessment of comparable rating analysis to neutral from positive.

We expect Nord Anglia's geographic diversity to improve post the acquisition of six Meritas schools and four international schools in Vietnam, resulting in a more balanced revenue and EBITDA distribution and stable growth.

Nord Anglia's enlarged scale will improve its competitive advantage, in our opinion. The company is one of the largest premium international school operators globally and is likely to sustain its market position amid a highly fragmented and competitive education services market. We believe the above factors underpin our assessment of Nord Anglia's business risk profile as fair.

"The stable outlook reflects our view that Nord Anglia will maintain its good market position in the premium school segment and continue to expand over the next 12 months through organic growth and acquisitions," said Ms. Chiou. "We believe the company's strong growth momentum, good profitability, and high visibility on cash flows temper the risk of an aggressive financial policy and high leverage."

We could lower the rating if Nord Anglia makes more aggressive and cash-exhaustive acquisitions than we expect, such that its liquidity deteriorates significantly. We could also lower the rating if the company's market position and profitability weaken significantly due to materially adverse operating conditions globally or weak integration of recent acquisitions. However, we consider such downside risk as limited.

We could raise the rating if the company can consistently improve its financial risk profile while maintaining its good market position and profitability. A reduction of the debt-to-EBITDA ratio consistently and comfortably below 6.0x while EBITDA interest coverage stays above 3.0x would indicate such improvement.