What's Happening
The U.K. government announced on Oct. 30, 2024, that it will introduce a 20% value added tax (VAT) for private schools in the country from Jan. 1, 2025 and remove business rates relief later in 2025. This could increase costs for school operators and, ultimately, households.
Why It Matters
At this stage, we expect the short-term effects on the current ratings will be limited. Nord Anglia (Bach Finance Ltd., B/Stable/--), Inspired Education (Inspired Education Holdings Ltd., B/Stable/--), and Cognita (Lernen Bondco PLC, B-/Stable/--) are among the main school operators in the U.K. and will be directly affected by this change. The three school operators are geographically diversified, which reduces their exposure to country-specific regulatory changes that are inherent to the industry. Inspired Education has recently increased its exposure to the U.K. through the acquisition of Alpha Group and currently operates 15 schools in the country (versus 111 globally). Nord Anglia only operates four schools in the U.K. (versus 83 globally), while Cognita has 40 schools in the U.K. (versus 109 schools globally).
Additionally, we believe all the three school operators would be able to partially pass on price increases to parents, given their target market of mid- to high-income families for whom private education remains a priority. While the extent of the fee increase is still uncertain, we do not expect private schools to pass on the full VAT increase as they balance the effect on EBITDA with various mitigating measures and cost saving initiatives. Even though we do not have visibility on the short- to-medium-term effects on demand, we consider education spending is largely inelastic in household budgets, underpinning the resilience of the schooling sector. Despite the measures being effective from Jan. 1, 2025, we expect most effects from these measures will start to materialize in the school year starting in fall 2025.
We note, however, that smaller players that only operate up to two schools could struggle to absorb the potential cost increase and pass on part of it to parents. This could accelerate the consolidation trend we have seen in the industry and thus benefit larger players, such as the three rated school operators. They could look to acquire smaller players and integrate them in their school portfolio, leading to further synergies and an increasing presence in the U.K.
What Comes Next
The new U.K. government measures will shake up the U.K.'s education ecosystem. That said, we believe that the three rated school operators are relatively well positioned to absorb the effects over the short term and that they could potentially benefit from further consolidation in the sector. We will continue to monitor the issuers' response to the new measures and the effects on their credit metrics over the forecast period.
Related Research
- Tear Sheet: Inspired Education Holdings Ltd., July 17, 2024
- EMEA-Based K-12 Schools: Sizable Investments May Slow Deleveraging After Strong Post-Pandemic Recovery, April 9, 2024
- Tear Sheet: Nord Anglia Education (Bach Finance Ltd.), Feb. 21, 2024
- Lernen Bondco (Cognita) Affirmed At 'B-' On Additional Liquidity And Good Operating Performance; Outlook Stable, Feb. 6, 2024
This report does not constitute a rating action.
| Primary Credit Analyst: | Raquel Delgado Galicia, London +44 (0) 7773131214; raquel.delgadogalicia@spglobal.com |
| Secondary Contacts: | Abigail Klimovich, CFA, London + 44 20 7176 3554; abigail.klimovich@spglobal.com |
| Mickael Vidal, Paris + 33 14 420 6658; mickael.vidal@spglobal.com |
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