Educational Institutions Rating

VIS Credit Rating Company Ltd. vis.com.pk 1 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 EDUCATIONAL INSTITUTIONS RATING METHODOLOGY VIS Credit Rating Company Limited.

VIS Credit Rating Company Ltd. vis.com.pk 2 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 Table of Contents SCOPE OF CRITERIA..........................................................................................................................................................................3 SUMMARY OF CRITERIA CHANGES ..........................................................................................................................................3 AN OVERVIEW OF RATINGS FRAMEWORK ..........................................................................................................................3 RATING METHODOLOGY...............................................................................................................................................................4 A. BUSINESS RISK PROFILE........................................................................................................................................................4 B. FINANCIAL RISK PROFILE.....................................................................................................................................................6 RATING SCALE & DEFINITIONS ...................................................................................................................................................7

VIS Credit Rating Company Ltd. vis.com.pk 3 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 SCOPE OF CRITERIA The criteria titled “Rating Methodology – Educational Institutions” apply to the evaluation of entities formally recognized and regulated as educational institutions, including universities, colleges, schools, vocational training centers, and other specialized organizations. As part of the service sector, these institutions are assessed through a distinct set of parameters tailored to their operating model. The rating framework incorporates both quantitative measures, such as financial performance and stability, and qualitative considerations, including governance, infrastructure, academic standards, and market positioning. Together, these factors determine the overall credit profile of Educational Institutions (EIs). SUMMARY OF CRITERIA CHANGES The Educational Institutions Rating Methodology dated September 2023 has been reviewed, and the fundamental criteria outlined therein remain unchanged. AN OVERVIEW OF RATINGS FRAMEWORK VIS employs two principal analytical frameworks: (A) Business Risk Profile, and (B) Financial Risk Profile for rating educational institutions. Within the Business Risk Profile, a methodical assessment is conducted that encompasses multiple facets such as market size, demand dynamics, competitive environment, and regulatory framework together with market positioning, legal structure, sponsor profile, mission and quality of management and teaching staff. Furthermore, quality of education is analyzed vis-à-vis student achievements, operational performance is evaluated by giving due consideration at historical stability and quality of earnings, student strength and growth trends, fee structures and operating efficiencies. Financial Risk Profile encompasses a review of revenue stability, the capital structure and liquidity and cash flow analysis. Business Risk Market Analysis and Relative Market Position Sponsor Profile & Management Quality Operational Performance Financial Risk Revenue and Margin Stability Capital Structure Liquidity & Cash Flow Adequacy

VIS Credit Rating Company Ltd. vis.com.pk 4 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 RATING METHODOLOGY Our assessment model is based on some key factors, qualitative and quantitative, which may further be broken down into sub-factors to comprehensively capture the rating drivers. A. BUSINESS RISK PROFILE Business risk profile constitutes a critical component in the educational institution rating methodology employed by VIS. The evaluation encompasses a holistic understanding of both internal and external factors that influence the institution's operational and financial stability. A. (i) Market analysis and relative positioning The demand for education is fundamentally shaped by demographic dynamics, including population size, population growth rate, and literacy levels. In many developing countries, high population growth creates a persistent supply￾demand gap in the education sector, thereby underpinning its relatively low cyclicality. Government Support and Regulation: The extent and quality of government support for education depends on its fiscal capacity and policy priorities. Where public education is robust, private institutions must differentiate themselves through higher quality offerings and a strong demand track record. Conversely, in cases where public provision is inadequate, private players often fill the gap, even at smaller scales. Regulatory oversight further determines entry barriers, quality standards, and institutional continuity. A proactive education policy generally enhances stability by ensuring compliance, whereas a lenient stance may allow substandard institutions to operate, though such entities still help bridge the supply-demand deficit. Legal Structure and Sponsorship: Educational institutions may be established under diverse legal frameworks—including corporate entities, trusts, societies, partnerships, or public sector ownership—each carrying distinct implications for governance, continuity, growth prospects, and financial resilience. Under trust structures, access to pooled resources, government grants, and donor allocations provides an additional layer of financial flexibility. The nature of sponsorship is another pivotal factor in the rating process. Sponsors may include philanthropic organizations, community groups, individuals, corporate entities, or government bodies. Their objectives vary: while governments and community-based sponsors often prioritize accessibility and subsidization, private and corporate sponsors may operate with more commercial objectives. Accordingly, an institution’s reliance on sponsor funding, its ability to manage large or extraordinary expenditures, and the financial standing of its sponsor are carefully assessed. Unless an institution demonstrates a high degree of operational independence, the sponsor’s financial strength and credibility often directly influence its credit profile. Market Positioning and Franchise Strength The relative positioning of an educational institution (EI) is assessed through a multi-dimensional approach that captures both its market reputation and long-term sustainability. An institution’s operating history and stability are important indicators, as a longer track record of consistent performance builds confidence in its continuity. Equally critical is the quality of infrastructure, including classrooms, laboratories, libraries, and IT facilities, which determines the adequacy and competitiveness of its academic environment. Student preference, reflected through enrollment patterns, retention

VIS Credit Rating Company Ltd. vis.com.pk 5 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 rates, and demand for programs, serves as a strong measure of the institution’s reputation in the education market. The achievements of alumni, their standing in professional and academic fields, and their continued engagement with the institution further enhance its franchise value and credibility. Franchise strength is also influenced by the breadth and diversity of academic offerings. Institutions that provide education across multiple levels—primary, secondary, and tertiary—while aligning their programs with both local and internationally recognized systems, typically hold stronger market positioning. At the higher levels, diversity in courses across disciplines such as arts, sciences, and other faculties enhances competitiveness. Academic affiliations and accreditations, including partnerships, exchange programs, and collaborative initiatives with reputed local and international institutions, further elevate the institution’s academic standing. In addition, physical resources such as classroom capacity, laboratory facilities, computer and project rooms, and the size and diversity of library resources (both physical and digital) play a significant role in shaping the quality of the learning environment. Taken together, these factors determine an institution’s ability to attract and retain students, sustain academic credibility, and deliver long-term value, making market positioning and franchise strength a central consideration in the rating methodology for educational institutions. A. (ii) Management Evaluating the rating of an entity within the education sector necessitates a comprehensive understanding of the management's objectives, guiding philosophies, and strategic initiatives that influence both the operational and financial performance of the institution. It is also important to develop a view of the depth and experience of the EI's management team and the adequacy of the succession plan of the top management. It is very important that the vision and strategies of the top management is effectively passed down in the organizational hierarchy. Level of faculty satisfaction is determined by their turnover rate. Motivation level of faculty is judged by their dedication and enthusiasm to convert the EI's goals and objectives into reality. The ratio of teacher to students in different classes reveals the potential of knowledge transfer, a lower number of students per teacher facilitates the focus and transfer of knowledge. An important aspect to look at is the clarity, efficacy and efficiency of the rules, procedures, and systems of governance in the EI. Well-documented systems and well-integrated IT systems will lead to efficient operations. Quality of internal audit is determined by the frequency and depth of audit reports within the institution. Inspection of management practices is also a crucial quality control measure. The curriculum holds prime importance. The internal system to research on, revise and modernize the curricula to be in line with changing needs of the society for future success of the institution is examined. Determining the adequacy and scope of the curriculum and its effectiveness and proper implementation is judged by the students’ performance during exams and in practical life after they have completed education. Number of credit transfers to foreign EIs establish the recognition which an EI enjoys and reinforces the education standard of the EI. Teachers' recruitment process and their training programs also play a vital role in maintaining the quality of education. Quality of entrance tests and the whole process of students' induction in the EI determines the quality of students enrolled. The minimum academic performance (e.g. GPA) expected from each student throughout the academic year is also a determinant of student quality maintenance. The interaction with parents particularly at primary level and on need basis at secondary and degree level is important feedback source to align the parent teacher aspirations.

VIS Credit Rating Company Ltd. vis.com.pk 6 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 The integration of ESG metrics into the rating methodology for EIs serves as a multifaceted lens through which long-term sustainability and ethical governance can be assessed. Here the involvement of the students in the ESG and/or community initiatives adds to the assessment value of EI. Environmentally, an institution's efforts in energy efficiency and waste management together with governance aspects of accountability, compliance and data privacy as well as social metrics such as diversity and inclusion and community engagement are evaluated under VIS “ESG RATING METHODOLOGY” available at our website on the following link, https://docs.vis.com.pk/docs/ESGRatingMethodology.pdf. An EI that scores well on ESG metrics is likely better equipped to navigate future challenges and maintain stakeholder trust, thereby providing a more holistic view of its creditworthiness. Building and upgrading education facilities that are child, disability, and gender-sensitive and provide safe, non-violent, inclusive, and effective learning environments for all are also important part of the ESG assessment. A. (iii) Operational Performance Operating performance is measured against the institution's mission statement. Growth in terms of the number of students, teachers, branches, different courses/curriculums offered, etc. is evaluated. Demand for admission will determine the franchise value that the EI has developed over the years and indicates its potential to attract enrollment in the future. The demand develops because of the academic achievements of students in the EI. Sources of revenue and stability and quality of earnings are assessed together with future sources of growth and diversification. Student and teacher growth over the past few years along with fee growth in the past and expected in the future is analyzed. Maintenance of operational efficiencies remains an important element in credit ratings of EIs. B. FINANCIAL RISK PROFILE Financial risk analysis encompasses analyzing the entity’s accounting quality, any qualifications made, method of revenue recognition and any material off-balance sheet items, which may require recasting of financial statements to reflect the true financial position of the entity. This is essential for an accurate assessment of its financial performance vis-à-vis peers. B. (i) Revenues & Margin Stability Historical financial performance is methodically analyzed through time-series trends and common-size financial statements. Budget-to-actual performance variances are reviewed to ascertain the reliability of management's forecasting abilities. Unlike entities in manufacturing/service sector which have cash inflow spread over the year, cash inflows of most of the educational institutions are relatively skewed as the tuition fee is collected annually/semi￾annually/quarterly/monthly. At the same time, cash outflow towards capital expenditure and operating expenditure is spread over the entire year. Given this, the management of cash flow assumes greater significance in educational institutions. Revenue growth is projected to emanate from two key areas: firstly, the expansion in student numbers, and secondly, the potential to increase tuition and other fees. In this context, management's strategic plans for institutional expansion are considered pivotal. Well established institutes with good track record of enrolment and entities with relatively diversified courses are better placed as they offer stability in revenue.

VIS Credit Rating Company Ltd. vis.com.pk 7 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 Revenue diversity, which encompasses multiple income streams, such as tuition, hostel, transport, and cafeteria fees. The evaluation also considers the diversification of courses and campuses that are offered in different geographical locations and/or franchises. These factors collectively inform an understanding of the institution's market positioning and its ability to leverage that positioning to generate sustained enrollment and revenue growth. Revenue visibility is assessed by considering proposed fee structures across diverse courses and by weighing expected occupancy rates against available operating seats and historical enrollment data. Cost control mechanisms, particularly given that staff salaries both teaching and non-teaching are a significant operational cost and are likely to rise commensurate with student growth. The variability of other costs in relation to capacity is also assessed, and the institution's capacity to manage these expenses becomes a vital consideration in the rating process. The trend in profitability margins vis-à-vis capital deployed is an important factor impacting the debt servicing ability of the institutes. With majority of the cost of an educational institution being of fixed nature, stability in margins is important. B. (ii) Capital Structure The adequacy of capitalization and the level of investment are assessed in parallel. Elevated debt leverage and cost of debt can significantly constrain financial flexibility and potentially exhaust new avenues for funding. Furthermore, EIs often hold substantial amounts of security deposits, acquired from students upon admission. These liabilities, which neither accrue interest nor have a fixed repayment term, are a distinctive financial characteristic of EIs. Thus, the gearing ratio becomes a more effective metric for comparative financial analysis among EIs. Due to the inherently illiquid nature of the assets belonging to EIs, a unique set of challenges emerges when valuing these assets for mortgage purposes. In addition, entities involved in offering education services generally need to carry out continuous capex for expanding capacity and improving existing infrastructure in order to ensure growth in revenue. While fulfilling the above obligation, effective planning of financing based on the existing and future cash flows is key to maintain/improve its financial position. B. (iii) Liquidity & Cash flow Adequacy Net cash from core operations and the cash flow cycle are subjects of monitoring to ensure the timely fulfillment of obligations related to debt principal and interest payments. The ability to manage cash flows, particularly timing mismatches between fee collection and debt servicing, is a key rating driver. While working capital is generally not a requirement in EIs, availability of funding lines or cash reserves provides comfort against any mismatch of cash flow that may arise. Timely realization of receivables remains a key rating driver. RATING SCALE & DEFINITIONS Rating scale and Definitions may be accessed at (https://docs.vis.com.pk/docs/VISRatingScales.pdf)

VIS Credit Rating Company Ltd. vis.com.pk 8 VIS Credit Rating Company Limited Educational Institutions AUGUST 2025 Islamic International Rating Agency – Bahrain – iira.com Credit Rating Information & Services Ltd. – Bangladesh – crislbd.com Japan Credit Rating Agency, Ltd. - Japan China Chengxin International Credit Rating Company Limited - China 128/C, 25th Lane off Khayaban-e-Ittehad, Phase VII, DHA, Karachi Tel: (92-21) 35311861-64 431, Block-Q, Commercial Area, Phase-II, D.H.A. Lahore - Cantt. Tel: (92-42) 35723411-13 www.vis.com.pk info@vis.com.pk VIS Credit Rating Company Ltd. Information herein was obtained from sources believed to be accurate and reliable; however, VIS does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information. Rating is an opinion on credit quality only and is not a recommendation to buy or sell any securities. Copyright VIS Credit Rating Company Limited. All rights reserved. Contents may be used by news media with credit to VIS. DISCLAIMER