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Curro Holdings Ltd. (COH) plans to sell as
much as 1 billion rand ($98 million) of property-backed bonds to
fund new schools in South Africa, which is languishing near the
bottom of global rankings for education.
The operator of private schools with more than 21,000
students will issue the first 150 million rand of securities in
two weeks, Chief Executive Officer Chris van der Merwe said in
an Oct. 30 interview. The bonds, to be sold over 12 months, will
complement bank loans, development financing and share sales,
Finance Director Bernardt van der Linde said.
The CEO’s goal of tripling the number of schools to 80 over
the next six to seven years may appeal to investors in a nation with the
third-worst education system, according to a World Economic
Forum survey this year. Securing the debt against Curro’s
property holdings provides an additional lure, said Arno Lawrenz, chief investment officer at Atlantic Asset Management
in Cape Town.
“Curro won’t struggle to place the bond,” said Lawrenz,
who helps oversee $376 million. “We fundamentally like the
sector the company is involved in. This kind of issue will also
suit development funds.”
The bond, arranged by PSG Capital Ltd., was rated A-, the
fourth-lowest investment grade, by Johannesburg-based
Global
Credit Ratings Co.
Feeding Unemployment
The low quality of schooling is feeding an unemployment
rate of 24.7 percent, the highest of more than 40 emerging
markets tracked by Bloomberg. About 3.3 million of the 10.4
million South Africans age 15 to 24 were not in employment,
education or training in the third quarter, official statistics
show.
While the government has widened access to education, the
next challenge is to improve the quality, Finance Minister
Pravin Gordhan said on Nov. 4 at the release of a report on the
country’s economy by Goldman Sachs Group Inc. The research said
South Africa must target economic growth of 5 percent to cut the
jobless rate.
The rand has lost 17 percent against the dollar this year,
the worst performer among 16 major currencies tracked by
Bloomberg. The currency strengthened 0.4 percent to 10.2050 per
dollar by 7.52 a.m. in Johannesburg, after weakening 1.1 percent
yesterday. Yields on bonds due December 2026 were unchanged
after rising six basis points, or 0.06 percentage point, to 8.16
percent yesterday.
GEMS Education Ltd., the world’s biggest closely held
operator of schools, plans to sell perpetual Islamic bonds as
the Dubai-based firm joins other companies in the Middle East
using the securities that limit pressure on a company’s
creditworthiness.
School Costs
The charge for a final-year high-school pupil at Curro
Aurora in Johannesburg was 58,488 rand in 2013, according to the
company’s
website. That compares with 198,960 rand for Hilton
College in KwaZulu-Natal, one of South Africa’s most expensive
schools.
It costs 55 million rand to 80 million rand to build a
school and two to three years to break even, Van der Merwe said.
The company reported first-half profit of 14.7 million rand on
Aug. 20 compared with a year-earlier loss of 2.9 million rand.
Curro, founded in 1998 and majority owned by PSG Financial
Services Ltd., raised 605 million rand in a March rights offer,
the third since Curro sold shares in Johannesburg in June 2011.
The stock has almost quadrupled to 20 rand a share since August
of that year.
The value of Curro’s property, plant and equipment climbed
83 percent to 1.57 billion rand by the end of June from a year
earlier. That gives bond holders “excellent” recovery
prospects, Global Credit Ratings said in an Oct. 28 report.
“It was a good move to attach the bond sale to property,”
said Lawrenz of Atlantic Asset Management. “In the next two to
three years, the interest-rate cycle will probably peak again
and then Curro’s yields will be attractive. It’ll be a nice
diversifier in a portfolio.”
Improving Education
Curro can improve education levels in South Africa, said
former headmaster Van der Merwe. The company has a 100 percent
pass rate for high-school graduates. It also runs nursery and
primary schools.
“Curro has a good story that everyone understands and will
likely want to support,” said Conrad Wood, who helps oversee
the equivalent of $8.2 billion in fixed-income investments at
Momentum Asset Management in Johannesburg.
The company has four types of school with different fee
levels, said CEO Van der Merwe.
“We don’t pay mega bucks to our teachers because we’re
trying to keep our school fees affordable,” he said. “Teachers
join us because we offer smaller classes -- 25 pupils at most
instead of 40 or more in government schools.”
Annual fees for the company’s Meridian schools, which
provide remedial tuition for disadvantaged students, start as
low as 12,000 rand. The development of these schools was partly
financed by a 397.1 million-rand loan in 2012 from a fund set up
by Old Mutual Plc (OML) and the Public Investment Corp.
Positive Feedback
Feedback from the market has been “very positive”
following a road show in June with South African fund managers,
Van der Linde said.
“For the first issue we’ll be looking for between three-and five-year funding,” he said. “We want to build a nice
profile over time and see if we can stretch it to seven years.”
The average South African pupil age 15 scored 13 percent
for math, according to the country’s 2012 Annual National
Assessment, as the African National Congress government
struggles to improve standards for the country’s black majority
in the wake of apartheid. The education system was ranked only
above Yemen and Libya in the World Economic Forum list, which
was topped by Switzerland.
