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22 Nov 2010
Approximately $1.2 billion of debt instruments affected
New York, November 22, 2010 -- Moody's Investors Service lowered The McGraw-Hill Companies,
Inc.'s (McGraw-Hill) senior unsecured rating to A3 from
A2 and its commercial paper rating to Prime-2 from Prime-1,
concluding the review for possible downgrade initiated on July 16,
2010. The downgrade reflects the increased exposure of Standard
& Poor's (S&P; McGraw-Hill's largest operating
division) to regulatory-driven structural changes in the rating
agency industry, and to litigation risks. The A3 rating is
below the level McGraw-Hill's market position and leverage profile
would support in the absence of such business/litigation risks.
The rating outlook is negative.
..Issuer: McGraw-Hill Companies (The)
....Senior Unsecured Commercial Paper,
Downgraded to P-2 from P-1
....Senior Unsecured Regular Bond/Debenture,
Downgraded to A3 from A2
....Senior Unsecured Medium-Term Note
Program, Downgraded to (P)A3 from (P)A2
..Issuer: McGraw-Hill Companies (The)
....Outlook, Changed To Negative From
Rating Under Review
Rating agencies are under intense scrutiny and numerous new regulations
have been adopted by many countries in the aftermath of the credit crunch.
Moody's does not anticipate that regulations passed to date will
materially alter S&P's market position or cash flow generation.
However, the global regulatory framework continues to evolve and
the risk of a future adverse development creates greater longer-term
uncertainty for McGraw-Hill relative to other issuers with comparable
Lower pleading standards for securities fraud cases as part of the Financial
Overhaul Legislation passed in July 2010 risk an increase in the number
of cases filed against McGraw-Hill that survive a motion to dismiss.
The liability standard on which securities fraud cases against rating
agencies is assessed in the U.S. has not changed.
However, the reduction in the pleading standard increases the risk
of more cases testing and potentially overcoming, at least in part,
S&Ps historically strong legal defense track record. Many lawsuits
relating to structured finance ratings in the recent credit crunch were
dismissed in whole or in part and there have been no final judgments against
S&P. An adverse litigation outcome against S&P or any other
rating agency that survives an appeal could nevertheless create a precedent
that other plaintiffs might seek to utilize. Legal defense costs
would also likely increase.
McGraw-Hill's A3 senior unsecured and Prime-2 commercial
paper ratings reflect its sizable cash flow generated from strong market
positions in education and professional publishing, financial information
and credit ratings, its conservative leverage profile; and
an approximate one notch rating adjustment for event risk. Certain
business lines are cyclical, continued challenges exist in the K-12
education and structured finance businesses, and the potential exists
for heightened competition and structural changes in the rating agency
industry to negatively affect S&P.
McGraw-Hill's financial profile is conservative with gross
debt-to-EBITDA (approximately 1.6x LTM 9/30/10 incorporating
Moody's standard adjustments) among the lowest of media issuers rated
globally by Moody's. Meaningful free cash flow generation,
a cash balance of approximately $1.3 billion, no debt
maturities until November 2012, and $1.2 billion of
undrawn revolving credit facilities support a strong liquidity position.
Moody's anticipates McGraw-Hill will utilize free cash flow
and a portion of its cash balance to fund acquisitions and distributions
to shareholders as the economic environment improves, with debt
remaining relatively unchanged.
The negative rating outlook reflects the evolving global regulatory landscape
facing rating agencies, and the risk that an adverse regulatory
or litigation development could exceed the event risk adjustment factored
into the current A3 rating.
A decline in operating performance and cash flow generation, acquisitions
or shareholder distributions that result in debt-to-EBITDA
leverage sustained above 2.5x or free cash flow-to-debt
below 16% could lead to a downgrade. Moody's will continue
to monitor regulatory and litigation developments and evaluate the effect
on S&P and McGraw-Hill. An adverse litigation/regulatory
development could create material downward rating pressure. If
commercial paper and other short-term debt outstanding were to
exceed multi-year backup credit lines and after-tax accessible
cash or other factors cause liquidity to weaken, the ratings could
also be downgraded.
The rating outlook could be moved to stable if future regulatory and competitive
developments do not materially alter S&P's business or McGraw-Hill's
financial profile, and if the one notch event risk adjustment continues
to be sufficient to capture these risks as well as litigation risk.
An upgrade is not likely at this time. Conservative liquidity management
and a view that litigation and any market or regulatory-driven
changes to S&P's business would not meaningfully affect the
company would be necessary to support an upgrade.
The last rating action on McGraw-Hill was on July 16, 2010
when its A2 senior unsecured and Prime-1 commercial paper ratings
were placed on review for possible downgrade.
Please see the credit opinion posted to www.moodys.com for
additional information on McGraw-Hill's ratings.
The principal methodologies used in this rating were Large Global Diversified
Media Industry published in November 2007, and Moody's Approach
to Global Standard Adjustments in the Analysis of Financial Statements
for Non-Financial Corporations published in February 2006.
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, McGraw-Hill Education, and
J.D. Power and Associates. McGraw-Hill has
more than 280 offices in 40 countries with LTM 9/30/10 revenue of approximately
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's lowers McGraw-Hill's ratings to A3 and Prime-2; outlook is negative
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