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Rating Action:

Moody's lowers McGraw-Hill's ratings to A3 and Prime-2; outlook is negative

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.

Downgrades:

..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

Outlook Actions:

..Issuer: McGraw-Hill Companies (The)

....Outlook, Changed To Negative From Rating Under Review

RATINGS RATIONALE

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 leverage.

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 $6.1 billion.

REGULATORY DISCLOSURES

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 Analytics information.

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.

New York
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Alexandra S. Parker
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.

Moody's lowers McGraw-Hill's ratings to A3 and Prime-2; outlook is negative
No Related Data.
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