Moody’s trims Teaching Strategies

Moody's Investors Service said it downgraded Foundational Education Group, Inc.'s (Teaching Strategies) ratings including its corporate family rating to Caa1 from B3, probability of default rating to Caa1-PD from B3-PD, first-lien bank credit facilities to B3 from B2, and second-lien term loan to Caa3 from Caa2.

The downgrade reflects weaker-than-expected top-line performance since the new issuance transaction in August of 2021 because of slower-than-expected sales year to date in the early childhood education, or ECE, market, Moody’s said. According to management, the ECE market is suffering due to teacher shortages and delays in stimulus funding deployment.

The agency said it estimates Moody's adjusted debt to EBITDA (after deducting product development cost and not including change in deferred revenue) increased to the mid-teens multiple for the LTM period ended Sept. 30 from the low teens’ multiple after the August 2021 LBO transaction.

“Furthermore, Moody's is concerned that the significant increase in interest expense for FY23 will weaken free cash flow because the company's debt ($318 million first-lien loan and $115 million in second-lien term loan) are all floating rate and there is no interest hedge in place.

“Free cash flow (before acquisition) year to date as of Sept. 30 was about $4 million. Moody's expects a free cash flow deficit in FY23 in the range of $15 million and expects the company will need to rely on its $50 million revolver (expires in 2026) to fund the cash flow shortfall during the year,” Moody’s said in a press release.

The outlook is stable.

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