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Rating Action:

Moody's affirms Pearson's Baa1 ratings; outlook remains negative

17 Apr 2015

London, 17 April 2015 -- Moody's Investors Service today said that it has affirmed the Baa1 long-term issuer and senior unsecured ratings assigned to international education media company, Pearson plc and its rated subsidiaries. Concurrently, the rating agency has also affirmed the P-2 short-term rating of Pearson Holdings Inc. The outlook on the ratings remains negative.

Despite considerably weak credit metrics in 2014, today's affirmation of Pearson's Baa1 ratings reflects Moody's expectation that company's credit metrics will likely improve in 2015 as a result of (1) the potential stabilisation of cyclical and policy related factors in its largest markets (North America, UK); (2) benefits to its EBITDA from the company's 2014-13 restructuring measures, as well as more moderate levels of future restructuring charges of around GBP30 million per annum; and (3) continued acquisition restraint during the year. Pearson's revenues and profitability in 2015 will also see some benefit from the weakening of sterling against the US dollar.

The negative outlook considers the need for further stabilisation in Pearson's key education markets as well as consistent execution on the company's operating plan in order to sustain metrics supportive of the rating.

RATINGS RATIONALE

Against the backdrop of a difficult operational environment and ongoing structural industry change in the company's key markets, Pearson's organic revenues in 2014 remained flat (after +1% in 2013) with modest growth in North America market segment (+2%), somewhat offset by the weaker performance in "Core" markets segment (-5%) and "Growth" markets segment (-1%). On a constant exchange rate basis (including acquisitions), Pearson's revenues in 2014 grew by 2%. However, reported headline revenue declined by 4% primarily due to adverse currency related movements.

Pearson has guided that the cyclical and policy related factors are likely to stabilize in 2015. Moody's expects improved organic revenue growth in North America (61% of Pearson's total revenues) in 2015 compared to 2014, helped by the performance of Higher Education learning services, Assessments and Connections businesses.

The Higher Education business in North America is expected to benefit from a further slowdown in enrolment contraction while good growth is likely in online higher education services. While Clinical Assessments and Connections will support the performance of its US Schools business, the US School learning services market remains competitive and is expected to see a relatively small adoptions year. Moody's expects that this business will continue declining for Pearson in 2015. The US School business could benefit from the PARCC contract win in 2015 but uncertainties remain as the Common Core roll-out could be disrupted by further policy related disruptions. In this regard, Moody's notes that Los Angeles Unified School District announced on 15 April 2015 that it will halt new deliveries of Pearson Education Inc. curriculum and will stop the use of Pearson products by 30 June 2015.

Within its "Core" markets segment (24% of total revenues), Pearson expects trading conditions to stabilize in the UK in 2015 after significant government reforms in 2014. Australia is likely to see flat revenue growth in 2015 as the good performance of inside services(online higher education services) is likely to be offset by the decline in learning services. The company's operations in Italy are likely to capitalize on the 2014 market share gains. Moody's expects other Partner markets to see good growth in 2015.

Within its "Growth" markets segment (15% of total revenues), Pearson expects good growth in China in its English language learning business in 2015 with continued stability in learning services. Pearson expects 2015 to be a better year than 2014 for its schools "sistemas" business in Brazil. South Africa is likely to see a more stable year compared to 2014 in learning services with modest growth in higher education direct delivery.

Moody's currently expects Pearson's reported operating profit to see good growth in 2015 (compared to GBP720 million in 2014) helped by the better trading performance during the year and the lower restructuring charges (GBP44 million of net restructuring charges in 2014 compared to GBP135 million in 2013) and cost savings from 2014 restructuring initiatives. Moody's also expects 2015 profit to benefit from the weakening of sterling against the US dollar. However Pearson's operating profit will carry the negative effect of certain shared services costs remaining with Pearson following withdrawal of Penguin.

Operationally, 2013 and 2014 have been the toughest years in the recent history of Pearson. After achieving a RCF/Net Debt ratio (as adjusted by Moody's) of 16.8% in 2013, the ratio further deteriorated to 13.8% in 2014. The ratio deterioration in 2014 was not only due to difficult trading conditions but also due to the exceptional restructuring related cash outflows. The reported net debt of the company increased to GBP1.64 billion (from GBP1.38 billion in 2013) reflecting the strengthening of the US dollar relative to Sterling, the acquisition of Grupo Multi partly offset by the disposal of Merger Market, increased dividends from Penguin Random House, and the growth in deferred revenues. The Gross Debt/ EBITDA ratio (as adjusted by Moody's) also deteriorated to 3.5x in 2014 after 3.0x in 2013.

In 2015, Moody's expects Pearson to achieve credit metrics in line with the parameters defined for its Baa1 rating helped by the expected improvement in trading conditions in its key markets, lower restructuring related cash outflows as well as benefits from the previous cost saving measures. Pearson has a publicly stated commitment towards its Baa1 rating, and we would expect the company to exhibit necessary acquisition restraint during 2015 in order to prioritize de-leveraging. However, Pearson's rating could come under negative pressure if its key markets fail to stabilize in 2015 and/ or if its credit metrics continue to remain weak in 2015.

RATIONALE FOR NEGATIVE OUTLOOK

The negative rating outlook cautiously reflects the potential challenges/ policy related disruptions that could emerge during the course of 2015 which could hinder the stabilization in Pearson's key markets during the year.

Pearson generates the majority of its EBITDA and cash flows in the third and fourth quarters in any given year. Therefore, Moody's will be closely monitoring Pearson's performance during the second half of 2015 in order to assess the impact of market stabilisation on Pearson's operating results.

WHAT COULD CHANGE THE RATING - DOWN

The Baa1 rating could come under pressure if (1) Pearson's revenues were to fail to demonstrate at least modest growth in 2015 on an underlying basis; (2) Pearson were unable significantly increase its reported operating profit on an underlying basis; (3) the company were to lose market share/key contracts to competitors on a sustained basis; and/or (4) Pearson were unable to sustain a retained cash flow (RCF)/net debt (as defined by Moody's) ratio at least in the high teens (in percentage terms) and maintain an adjusted debt/EBITDA ratio of below or around 3x.

WHAT COULD CHANGE THE RATING - UP

Moody's does not see a near-term catalyst for an upgrade. Should Pearson sustain an RCF/net debt ratio above the mid-twenties in percentage terms, free cash flow/net debt in excess of the mid-teens in percentage terms and debt/EBITDA well below 2.5x (all ratios as adjusted by Moody's), upgrade pressure could build over time.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Large Global Diversified Media Industry published in December 2010. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Pearson is an international media company with a strong focus on education. The group recorded GBP4.9 billion in sales and GBP720 million in reported adjusted operating profit in 2014.

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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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.

Gunjan Dixit
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's affirms Pearson's Baa1 ratings; outlook remains negative
No Related Data.
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