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Rating Action:

Moody's downgrades McGraw-Hill to Baa2 from A3, rating outlook is negative

Global Credit Research - 14 Feb 2013

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
No Related Data.

 

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