Approximately $800 million of debt instruments affected
New York, February 14, 2013 -- Moody's Investors Service downgraded The McGraw-Hill Companies
(McGraw-Hill) senior unsecured rating to Baa2 from A3, concluding
the review for downgrade that was initiated on September 12, 2011.
The downgrade reflects the loss of earnings and business diversity that
will result from the expected completion of the $2.5 billion
sale of McGraw-Hill Education (MHE) to investment funds managed
by affiliates of Apollo Global Management, LLC (Apollo) as well
as heightened litigation risks in light of the recent civil lawsuits filed
against McGraw-Hill and its subsidiary Standard & Poor's
Financial Services LLC (S&P) by the Department of Justice (DOJ) and
various state attorneys general. McGraw-Hill's Prime-2
short-term rating for commercial paper is not affected.
The rating outlook is negative.
Downgrades:
..Issuer: McGraw-Hill Companies (The)
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)Baa2 from (P)A3
....Senior Unsecured Regular Bond/Debentures,
Downgraded to Baa2 from A3
Outlook Actions:
..Issuer: McGraw-Hill Companies (The)
....Outlook, Changed To Negative From
Rating Under Review
McGraw-Hill has reclassified MHE to discontinued operations and
expects the sale to Apollo to close in the first quarter. In the
event that the Apollo transaction does not close as anticipated,
we believe that McGraw-Hill would revert to its prior plan for
a spin-off of MHE or would seek another buyer. Accordingly,
the downgrade and Baa2 rating factors in the disposition of MHE,
which will reduce the company's business diversity and cash flow
generation. Moody's believes McGraw-Hill's nearly
10% increase in the dividend in January 2013 indicates the company
will not cut the dividend upon completion of the MHE sale. The
foregone MHE earnings and maintenance of the dividend will reduce McGraw-Hill's
free cash flow.
McGraw-Hill has indicated that it will vigorously defend itself
in ratings-related litigation, but has not ruled out settlements.
However, adverse outcomes could have substantial negative implications
for McGraw-Hill's credit profile. The Baa2 rating
balances the company's history of prevailing in its legal defenses
against the potentially substantial negative credit effects that could
result from adverse litigation or settlement outcomes. In addition,
the management focus and direct costs involved in defending litigation
may be a persistent drag on the company's operations over the intermediate
term.
RATINGS RATIONALE
McGraw-Hill's Baa2 senior unsecured rating and Prime-2 short-term
rating for commercial paper reflect its sizable cash flow generated from
good market positions in financial information and credit ratings,
its conservative leverage profile, its narrowed business focus and
potentially significant exposure to litigation related risks. Moody's
estimates that 60-80% of ongoing revenue has cyclical aspects,
with a mix of contractual revenue streams and transaction-dependent
revenue. S&P, which is McGraw-Hill's largest operating
division, has a strong global market position but is also exposed
to regulatory-driven structural changes in the rating agency industry
and to litigation risk. McGraw-Hill's conservative financial
profile and the expected MHE net sale proceeds ($1.9 billion)
provide some flexibility to manage these risks with gross debt-to-EBITDA
leverage (in a low 2x range incorporating Moody's standard adjustments,
the redeemable put related to the S&P/DJ JV, and the proposed
MHE sale) among the lowest of media issuers rated globally by Moody's.
Moody's anticipates McGraw-Hill will maintain a sizable cash
balance, but also expects the company will utilize cash and projected
free cash flow for acquisitions and continued high shareholder distributions.
The July 2013 expiration of McGraw-Hill's $1.2
billion revolver and the $457 million commercial paper borrowings
at the end of 2012 create potential pressure on McGraw-Hill's
near-term liquidity position. The company had $761
million of cash at the end of 2012, although a majority of the cash
is outside the U.S. and repatriation would result in tax
leakage. The company's cash holdings and Moody's projection
for 2013 free cash flow in a $300 - $350 million
range provide modest coverage of commercial paper borrowings. Moody's
ratings anticipate that McGraw-Hill obtains a new revolving credit
facility or extends the maturity of the existing facility. The
company's liquidity position will improve meaningfully upon completion
of the MHE sale as McGraw-Hill is expected to repay commercial
paper borrowings with the net proceeds and maintain a sizable cash balance.
The negative rating outlook reflects the potential for additional adverse
litigation and regulatory developments and the resulting uncertainty created
for McGraw-Hill's operations and financial position.
An upgrade is unlikely in the foreseeable future given the ongoing litigation
and regulatory risk. The rating outlook could be changed to stable
if litigation and regulatory risk diminishes, provided that McGraw-Hill
also maintains solid market positions in its businesses, a conservative
leverage profile, good free cash flow, and a strong liquidity
position.
A significant decline in operating performance and cash flow generation,
substantial acquisitions or shareholder distributions, or a deterioration
of the company's liquidity position could create downward rating
pressure. Adverse litigation or regulatory developments could create
material downward rating pressure.
Please see the credit opinion posted to www.moodys.com for
additional information on McGraw-Hill's ratings.
The principal methodology used in this rating was the Large Global Diversified
Media Industry Methodology published in December 2010. Please see
the Credit Policy page on www.moodys.com for a copy of this
methodology.
McGraw-Hill, headquartered in New York, NY, is
a global information services provider with operations in financial services,
educational publishing and business information markets under brands such
as Standard & Poor's, and J.D. Power and Associates.
McGraw-Hill has more than 280 offices in 40 countries with FY 2012
revenue of approximately $4.5 billion pro forma for the
pending sale of MHE.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the rating action on the support provider and in relation to each particular
rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides certain regulatory disclosures in relation
to the provisional rating assigned, and in relation to a definitive
rating that may be assigned subsequent to the final issuance of the debt,
in each case where the transaction structure and terms have not changed
prior to the assignment of the definitive rating in a manner that would
have affected the rating. For further information please see the
ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this rating action, and
whose ratings may change as a result of this rating action, the
associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's downgrades McGraw-Hill to Baa2 from A3, rating outlook is negative
