IU Group generates decent cash flow and is fueled by years of massive growth in student intake but not all investors see it as a valedictorian of the current loan cohort. The largest German private university business is Oakley Capital’s star portfolio performer. EBITDA numbers dominate the register of concerns, dressed in addbacks that leaves leverage toppy after analyst’s sharpen their pencils for substantial haircuts. 

The sponsor is dipping into the inkwell for yet another hefty dividend having received its full bursary investment back. Combined with a friendly portability feature for next two years some suggest Oakley Capital’s exit could be in the making adding future uncertainty for some, especially if things go south afterwards. The business benefited from remote studying during the pandemic, but costs may rise as students return to bricks and mortar universities. 

Led by sole bookrunner JPMorgan, borrower is seeking a new €500m Term Loan B due 2028 which refinancing €310m of existing debt and pays a €175m shareholder distribution. Price talk is set at E+ 450 bps and 99.5 OID with 0% floor. Commitments are due on Tuesday (30 November) at 4pm UK time. The new facility is privately rated B3 by Moody’s.

“I think it is alright, it is doable, but the B3 rating is not good for us,” said the first buysider. “I don't mind B3, I just wanna be paid for it, so I think it needs to go wider at E+475-500 bps for 99 OID.” 

The cost of university education for borrowers varies across the LevFin universe and, besides rating and country, it is also driven by scale of the business, exposure to sole institution risk or how tech-forward the platform is.

In comparison, Italian e-learning higher education provider Multiversity priced it's B2-rated €765m SSFRNs due 2028 at 4.25% with 99.75 OID on 21 October. Conversely, Ardian’s buyout of French university platform AD Education priced 500 bps over Euribor, with a 0% floor at 98.5 OID in February, at the time bucking the trend of tightening market and widening significantly from initial talk. Spanish private university Universidad Europea’s TLB that priced in February 2019 with a E+ 425bps margin is currently quoted at 98.62.

Dressing up for school

IU Group is the company name for the International University of Applied Sciences, a private university which offers digital and also in-campus learning with presence in 28 German cities. The group has massively multiplied student enrollment in recent years, reaching 3% of overall German student intake. 

IU Group grew way ahead of its peers, adding 22,563 new students in 2020/2021 academic year, almost doubling its overall number of its cohort to over 48,000, according to the German Federal Statistical Office. FOM University and Hochschule Fresenius University had the second and third biggest increases, showing a big gap to IU Group on attainment as they only gained 1,868 and 1,429 new students each. 

Fresenius University still kept the first spot with overall 52,580 students, but already this academic year IU Group is likely to leapfrog into first place. Student enrollment was 70% higher in the first half of 2021 than in 2020 and the company expects to finish the final quarter of 2021 with 84,000 students, two buysiders quoted from numbers presented by the management to lenders. Enrollment for the current academic year from its biggest competitors are not yet publicly available for comparison.

IU Group enjoys massive growth in student enrollment

Nevertheless, it is clear the company is pitching itself as the unicorn of the education sector. 

“They don't own a campus, so it is technically educational services: an internet subscription, not different from Netflix. The main question is how quickly you can sign up students but I am curious how sustainable the enrollment is,” said second buysider.

IU Group’s newest cap stack is structured from €130.3m of adjusted EBITDA, which puts  leverage on paper at the low end of LevFin issuance at 3.7x net senior, and 4.1x net total. 

But these figures depend on your degrees of confidence in their workings - summed via a hefty EBITDA bridge with chunky earnings benefits in their algebraic calculation.

Coming off €78m expected pro forma FY 2021 EBITDA that already includes an expected €12m boost from current numbers towards year end, additional adjustments include a €35m annualisation effect if the student body was full in place for the whole year and a €18m marketing spend that IU thinks it no longer requires. 

Analysts were not short of haircuts in their EBITDA assessment, quoted as “crazy” by third buysider and the lengthy addbacks bridge put off a fourth buysider from advancing the transaction through his investment committee. 

“My EBITDA is rather at €75m before the leases, the €130m figure is a very techy way of looking at it,” added the fifth buysider who also declined the deal after much examination. 

IU Group has had a good run in growing reported EBITDA from €16m in 2017 when Oakley acquired the group to €23m, €37m, and €50m in 2018, 2019 and 2020, respectively. Still, at least four buysiders believe it is benefitting from the pandemic making courses more easily accessible and giving remote and furlough workers more time to pick higher education to improve their career prospects. The company makes around 70% of its revenue selling to companies and the rest is from individual enrollment.

The buyside expects IU Group will still need marketing spend to keep improving volumes. The sector is competitive as the company is quite aggressive on pricing and has historically offered promotions, adds the fifth buysider. 

“You can compare it to Multiversity where 10% growth was put down to Covid-19, but the rest was aggressive marketing spend,” said the sixth buysider. "Adjustments aren’t impossible, but let’s say we buy into a €112m EBITDA because €18m benefit is least believable or even at €95m, this is a 6x [levered] business. Still very toppy."

On the other hand, the company is highly cash generative and on the structured €130.4m EBITDA it gives a 42.5% EBITDA margin, in line with subscription-based businesses, and nearing Multiversity levels. 

However, it is also a brick and mortar business with a blended in-house and remote course structure. A few buysiders raised worries that rising capex costs could weigh on the business, especially after all the students come back after the pandemic. The seventh buysider views IU Group’s EBITDA margins at 28%. 

IU Group, however, is a capex-lite business with maintenance capex of just €10.5m (4.5% of sales) and growth capex of €31m - mostly spent on course development.

“I see no problem in the business, it is a solid performer and yes, it has probably benefited from Covid-19, but education is resilient and stable,” said the first buysider. 

Sponsor’s graduation 

Oakley Capital is not the most attractive PE sponsor in buysiders’ eyes because of a limited track record and unfamiliarity in the LevFin universe compared to the big buyout houses.

“I don't know the sponsor that well, they look all very young, they need a little bit of facial hair,” said the second buysider.

Oakley Capital bought a majority stake in the company in November 2017 through a carve-out from US Apollo Education Group funded by a unitranche from BlueBay. Annual reports show and sources agree that sponsor already has received it’s initial €99m investment, and some more. 

In combination with the newest transaction, sponsor’s shareholder distributions would total €415m, having taken out a €240m dividend in the previous transaction. In addition, the new capital structure does not disclose net capitalisation and the implied equity in the transaction, which bothered some buysiders.

“We’re passing because of this, the sponsor will dip [pay dividends] and if anything goes wrong that leaves lenders with the reins since they’ve [already] got what they wanted. Plus [IU Group] doesn’t own infrastructure, so if anything goes wrong it will be in the 50s,” said the sixth buysider. 

Documentation is deemed aggressive by those polled by 9fin, with the main irk a loose portability feature that points to the sponsor planning an exit in the near future. Terms allow for portability not triggering a change of control if agreed within 24-months post-closing, with applicable permitted investors able to invest at least 30% in equity without any leverage test. 

IU Group is the biggest earner in Oakley Capital’s portfolio and is the only company bringing double digit NAV at 12.3%, ahead of tech business WebPros at 6.9% NAV and another education business Schülerhilfe with 5.7% NAV, according to latest fund reports. 

“I have recommended we decline the deal. I like the business and think there is potential, but the EBITDA adjustments are crazy, the dividend again is taking cash out while the sponsor has been aggressive and the docs are awful,” said the third buysider.

Docs include other usual aggressive terms such as a margin ratchet coming with three step-downs besides the usual two, cutting margins by 25bps at 3.35x, 2.85x and 2.35x senior net leverage.

Unlimited restricted payments also give a lot of leeway and can be made if total net leverage is under 3.5x, with uncapped investments permitted under 3.75x total net and uncapped junior debt prepayments allowed if total net leverage is under 4x. Payments be made without being subject to a maximum leverage or other ratio condition, if funded from the available amount.

The deal includes an ESG ratchet mechanism that adjusts the margin by two basis points (up and down) on a KPI based on students from low-income countries as a portion of total admissions.

JPMorgan declined to comment.

Oakley Capital and IU Group did not respond to a request for a comment.