World’s Third-Worst Education Inspires Bond: South Africa Credit

Curro Holdings Ltd. 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 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.

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.

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 rose 0.2 percent to 10.2224 per dollar by 4:19 p.m. in Johannesburg, after weakening 1.1 percent yesterday. Yields on bonds due December 2026 dropped one basis point to 8.15 percent 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.

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 and the Public Investment Corp.

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.”

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