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Rating Action:

Moody's lowers Washington Post's rating to A2 from A1; outlook is negative

28 Oct 2010

$400 million of outstanding debt affected

New York, October 28, 2010 -- Moody's Investors Service downgraded The Washington Post Company's (WPO) senior unsecured note rating to A2 from A1 and confirmed the company's Prime-1 commercial paper rating, concluding the review for downgrade initiated on August 17, 2010. The downgrade reflects Moody's expectation that proposed Department of Education (DOE) gainful employment guidelines regarding access to Title IV student loans for private for-profit educational institutions and the implementation of operating strategies to reduce Title IV student loan default rates will negatively affect the earnings of Kaplan, which is WPO's largest operating segment. The rating outlook is negative.

Downgrades:

..Issuer: Washington Post Company (The)

....Senior Unsecured Regular Bond/Debenture, Downgraded to A2 from A1

Confirmations:

..Issuer: Washington Post Company (The)

....Commercial Paper, Confirmed at P-1

Outlook Actions:

..Issuer: Washington Post Company (The)

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

RATINGS RATIONALE

Moody's anticipates in the ratings that Kaplan's EBITDA will begin to decline in 2010's fourth quarter and drop by 25-35% in 2011, leading to an increase in WPO's debt-to-EBITDA leverage (1.5x LTM 7/4/10) to a high 1x range in 2011. Declines in enrollment and revenue at Kaplan's higher education division as well as the costs of the company's strategies to address the underlying causes of student loan repayment problems are the primary drivers of the expected drop in earnings. The magnitude of enrollment shifts and the effect on Kaplan's cash flow over the longer-term are uncertain and will in part depend on the cost and effectiveness of the company's strategies to attract and retain students that are less likely to have difficulty servicing their loans, but the expected earnings outcome is directionally negative.

The strategy shifts are occuring at a time of heightened regulatory uncertainty. The DOE proposed guidelines in July 2010 that would impose minimum student repayment and maximum debt-to-income requirements on educational programs in order for their students to remain eligible for Title IV loans. However, the DOE is delaying release of final repayment rate and debt-to-income rules (originally scheduled for November 1, 2010) pending its evaluation of the potential ramifications that the regulations could have on student aid and access to education as well as an extraordinarily large number of comments on the proposed rules (reportedly in excess of 80,000). In advance of final rule making, industry participants such as Kaplan are taking action to try to address the Title IV loan repayment concerns.

The "Kaplan Commitment" program Kaplan launched on September 27, 2010 and is implementing over the next several months allows students to attend classes for an introductory period without paying tuition. The program is a key component of Kaplan's strategy relating to the gainful employment standards and student loan repayment probelms. In Moody's opinion, such strategies will meaningfully and negatively affect the level of incoming paid enrollment and revenue in the near term. Moody's believes for-profit schools such as Kaplan serve a non-traditional student population that does not fit as well into the programs and controlled enrollment levels offered by traditional public and private not-for-profit institutions. Kaplan higher education is thus viewed as a sustainable business and this is an important factor contributing to WPO's A2 and Prime-1 ratings, but the level of enrollment that balances access to education for the target market and manageable student debt loads will only become clear over time.

WPO's ratings reflect good cash flow generated from a diverse portfolio of businesses and a conservative financial orientation that has sustained low leverage. The company is diversified within and outside of media, with the education businesses, cable television, and a mix of mature local television station properties the primary earnings drivers. WPO is most strongly associated with The Washington Post newspaper, but its cash flow generation is modest and not a meaningful rating driver. Low debt-to-EBITDA leverage and a strong liquidity position are important rating considerations that are byproducts of WPO's disciplined investment strategy, although Moody's believes the company is not opposed to leveraging transactions for the right strategic opportunity and lately it has more aggressively used its existing cash to repurchase shares in response to the drop in its stock price.

The negative rating outlook reflects the uncertain magnitude of the longer-term effect that the DOE's proposed gainful employment regulations and Kaplan's initiatives to reduce student debt burdens will have on Kaplan's earnings. While Moody's expects WPO's leverage to remain low, pressure on Kaplan's cash flow and/or WPO's more aggressive use of cash could weaken the company's credit metrics or currently strong liquidity position.

Moody's views the likelihood of an upgrade as low given the expected decline in Kaplan's enrollment and earnings. However, revenue and cash flow growth in education and cable television and stabilization of the advertising-driven media businesses such that debt-to-EBITDA sustained in a low 1x range, and free cash flow conversion is sustained above 30% could lead to an upgrade.

A deterioration in operating performance, acquisitions or cash distributions to shareholders that sustains debt-to-EBITDA above 2.0x or free cash flow-to-debt below 22.5% could lead to a downgrade. Rating pressure could also occur if the company's solid liquidity position were to weaken. The primary near-term concern is the performance of Kaplan, and a greater than anticipated deterioration in enrollment or earnings with uncertain prospects for a recovery would be a rating concern.

The last rating action on WPO was on August 17, 2010 when Moody's placed the company's A1 senior unsecured and Prime-1 commercial paper ratings on review for possible downgrade.

Please see the credit opinion on www.moodys.com for additional information on WPO's ratings.

The principal methodology used in rating Washington Post Company was Large Global Diversified Media Industry rating methodology published in November 2007. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found on Moody's website.

WPO, headquartered in Washington DC, is a diversified education and media company whose operations consist of: Kaplan education (62% of revenue), cable television (16%), newspaper publishing (15%) and television broadcasting (7%). Consolidated revenue was approximately $4.6 billion for the LTM 7/4/10 period.

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's information, 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
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Moody's lowers Washington Post's rating to A2 from A1; outlook is negative
No Related Data.
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