Approximately $5.9 billion of debt instruments affected
New York, November 13, 2012 -- Moody's Investors Service downgraded Cengage Learning Acquisitions,
Inc.'s (Cengage) Corporate Family Rating (CFR) to Caa3 from Caa1,
Probability of Default Rating (PDR) to Caa3 from Caa2, speculative-grade
liquidity rating to SGL-4 from SGL-3, and instrument
ratings as detailed in the debt list below. The downgrades reflects
Moody's view that the sharp revenue and EBITDA declines in Cengage's
fiscal 2013 first quarter further complicate the company's already
difficult tasks of materially reducing its very high leverage and addressing
its significant $2.7 billion of 2014/2015 maturities,
thereby elevating default risk. The rating outlook is negative.
Cengage attributed the significant revenue and EBITDA decline to a combination
of market (continued textbook rental market inroads, soft higher
education enrollment particularly at career colleges, adoption deferrals,
and pressure on library funding) and company-specific factors.
Moody's believes the actions Cengage is implementing to mitigate
marketplace pressures and address company-specific factors (such
as improving channel partner management and adjusting sales force incentives
and training to increase adoption of products that require students to
utilize digital solutions) will take time to implement and involve execution
risk. However, Cengage's approaching maturities and
near-term pressures on the higher education market provide limited
flexibility to execute a turnaround and materially reduce leverage.
An increase in Cengage's secured debt-to-EBITDA ratio
to 6.8x also currently eliminates the company's capacity
within the secured debt ratio incurrence limits in its various debt agreements
(although some secured debt capacity remains within lien baskets) and
reduces cushion within the maximum 7.75x net secured debt maintenance
covenant in its credit facility. This along with provisions such
as the most favored nation pricing clause in Cengage's credit facility
will also make it difficult to address maturities and maintain positive
free cash flow after factoring in the likely significant increase in cash
interest costs.
Cengage is reportedly a bidder for McGraw-Hill Education (MHE),
although there are reportedly other potential bidders for the company.
A transaction with MHE would increase Cengage's scale in the higher
education business and likely be de-leveraging when factoring in
synergies. However, Moody's believes Cengage would
need to resolve its maturities issues as part of any proposed financing
for a MHE transaction, and this would be challenging given the pressure
on its business and its high secured and total leverage.
Downgrades:
..Issuer: Cengage Learning Acquisitions, Inc.
.... Corporate Family Rating, Downgraded
to Caa3 from Caa1
.... Probability of Default Rating,
Downgraded to Caa3 from Caa2
.... Speculative Grade Liquidity Rating,
Downgraded to SGL-4 from SGL-3
.... Senior Secured Bank Credit Facility,
Downgraded to Caa2, LGD3 - 37% from B2, LGD2
- 21%
.... Senior Secured Regular Bond/Debenture
(First Lien Notes), Downgraded to Caa2, LGD3 - 37%
from B2, LGD4 - 65%
.... Senior Secured Regular Bond/Debenture
(Second Lien Notes), Downgraded to Ca, LGD5 - 85%
from Caa3, LGD4 - 65%
.... Senior Unsecured Regular Bond/Debenture,
Downgraded to Ca, LGD6 - 92% from Caa3, LGD5
- 78%
Loss Given Default Updates:
.... Senior Subordinated Regular Bond/Debenture,
Changed to LGD6 - 95% from LGD5 - 85% (no
change to Ca rating)
RATINGS RATIONALE
Cengage's Caa3 CFR reflects its very high debt-to-EBITDA
leverage (11.1x LTM 9/30/12 incorporating Moody's standard adjustments
and cash pre-publication costs as an expense), limited free
cash flow generation and elevated default risk due to the significant
refinancing risk associated with its 2014/2015 maturities. Cengage
has a good market position and broad range of product offerings in higher
education publishing. Moody's believe the company has moderate
growth prospects over the intermediate term and is reasonably positioned
to transition its revenue as higher education publishing continues to
shift to digital from print formats. Cengage nevertheless faces
multiple near-term operating headwinds from market and company-specific
issues. Moody's believes earnings pressure and Cengage's high leverage
reduce flexibility to address the sizable $2.7 billion of
remaining 2014/2015 maturities, creating elevated default risk.
The maturity on Cengage's $300 million 2017 revolver springs to
April 2014 if more than $400 million of the approximate $2.1
billion of 2014 term loans are outstanding as of that date and the maturity
of the company's $1.3 billion 2017 term loan springs to
October 2014 if more than $350 million of the remaining $404
million of 10.5% senior unsecured notes are outstanding
as of that date.
Moody's is reverting to a 50% mean family recovery rate assumption
given the sharp jump in debt-to-EBITDA leverage to 11.1x
from 9.3x (incorporating Moody's standard adjustments and cash
pre-publication costs as an expense) in the first quarter.
This results in a two-notch reduction in the CFR to the same Caa3
level at which the PDR is placed.
The downgrade of Cengage's liquidity rating to SGL-4 from
SGL-3 reflects weaker cash flow generation and higher risk of a
covenant violation over the next 12-15 months. Moody's believes
cash (approximately $57 million as of 9/30/12) and unused capacity
under the $300 million April 2017 revolver commitment provide modest
coverage of the approximate $36 million of required annual term
loan amortization, seasonal cash needs, and potentially limited
to negative free cash flow generation. The breadth of the operating
challenges contributing to the significant first quarter earnings decline,
as well as the time required and execution risks associated with the company's
turnaround plans make positive free cash flow generation questionable
over the next 12-15 months. Moody's estimates that
Cengage has an approximate 13% EBITDA cushion within the maximum
7.75x net senior secured leverage covenant in its credit facility
(there are no step downs in the covenant). However, there
is greater uncertainty regarding Cengage's ability to comply with
the covenant over the next 12-15 months given the operating pressures
and the company's possible use of incremental secured debt to at
least partially address its unsecured debt maturities.
The negative rating outlook reflects the elevated risk of default unless
the company can reverse its weak operating performance and refinance maturities.
Heightened near-term risk of default including through distressed
exchange transactions, or a reduction in the recovery assumption
could lead to downward pressure on the CFR, instrument ratings and/or
the PDR rating. Cengage's ratings could also be downgraded if the
company is unable to make de-leveraging progress or generate and
sustain comfortably positive free cash flow. A weakening of liquidity
would also pressure Cengage's ratings including through such factors as
significant revolver usage, weaker or negative free cash flow,
erosion of the covenant cushion, or changes in the likely cost of
refinancing.
An upgrade or a shift to a stable rating outlook is unlikely unless the
company is able to address its 2014/2015 maturities at a manageable cost.
If that were to occur, Cengage could be upgraded if good operating
execution leads to revenue and earnings growth, consistent free
cash flow generation and reduced leverage, or the company de-levers
through asset sales, an equity offering or acquisitions.
Please see the credit opinion on the issuer page on www.Moodys.com
for additional information on Cengage's ratings.
The principal methodology used in rating Cengage was the Global Publishing
Industry Methodology published in December 2011. Other methodologies
used include Loss Given Default for Speculative-Grade Non-Financial
Companies in the U.S., Canada and EMEA published in
June 2009. Please see the Credit Policy page on www.moodys.com
for a copy of these methodologies.
Cengage, headquartered in Stamford, CT, is a provider
of learning solutions to colleges, universities, professors,
students, libraries, reference centers, government agencies,
corporations and professionals. Cengage publishes college textbooks
and reference materials, and supplements its print publications
with digital solutions. The company was acquired by funds managed
by Apax Partners and OMERS Capital Partners in a $7.3 billion
leveraged buy-out from Thomson Reuters Corporation in July 2007.
Revenue for the LTM ended September 30, 2012 was approximately $1.8
billion.
REGULATORY DISCLOSURES
The Global Scale Credit Ratings on this press release that are issued
by one of Moody's affiliates outside the EU are endorsed by Moody's
Investors Service Ltd., One Canada Square, Canary Wharf,
London E 14 5FA, UK, in accordance with Art.4 paragraph
3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies.
Further information on the EU endorsement status and on the Moody's
office that has issued a particular Credit Rating is available on www.moodys.com.
For ratings issued on a program, series or category/class of debt,
this announcement provides relevant regulatory disclosures in relation
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rating practices. For ratings issued on a support provider,
this announcement provides relevant regulatory disclosures in relation
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rating action for securities that derive their credit ratings from the
support provider's credit rating. For provisional ratings,
this announcement provides relevant 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
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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
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John Diaz
MD - Corporate Finance
Corporate Finance Group
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Releasing Office:
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Moody's downgrades Cengage's CFR to Caa3 from Caa1; rating outlook is negative
