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Rating Action:

Moody's upgrades McGraw Hill's ratings; outlook stable

07 Jan 2021

Approximately $2.4 billion of rated securities affected

New York, January 07, 2021 -- Moody's Investors Service ("Moody's") upgraded McGraw Hill LLC's ("McGraw") ratings, including its CFR to B3 from Caa2, the company's new credit facilities to B2 from B3 and new junior priority secured notes to Caa2 from Caa3. The rating outlook was changed to stable from rating on review. This concludes the review for upgrade initiated on 15 December 2020.

The upgrades reflect the company's successful completion of the refinancing consistent with the proposed terms. The refinancing is a strong credit positive because it eliminated near term refinancing risks and extended access to external liquidity without materially increasing cash interest expense or leverage. In addition to the credit positive impact of the refinancing, today's rating actions take into account McGraw's solid operating performance in its seasonally important quarter ending September 30 (when it typically generates over 50% of annual billings), which Moody's expects will continue over the next 12-18 months.

Upgrades:

..Issuer: McGraw Hill LLC

.... Corporate Family Rating, Upgraded to B3 from Caa2

.... Probability of Default Rating, Upgraded to B3-PD from Caa2-PD

....Senior Secured Bank Credit Facility (Revolver due November 2023 and Term Loan due November 2024), Upgraded to B2 (LGD3) from B3 (LGD3)

....Senior Secured Bank Credit Facility (Revolver due May 2021 and Term Loan due May 2022), Upgraded to B2 (LGD3) from Caa1 (LGD3)

....Senior Secured Regular Bond/Debenture, Upgraded to Caa2 (LGD5) from Caa3 (LGD5)

....Senior Unsecured Regular Bond/Debenture, Upgraded to Caa2 (LGD6) from Caa3 (LGD5)

Outlook Actions:

..Issuer: McGraw Hill LLC

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

RATINGS RATIONALE

McGraw's B3 CFR reflects the company's high financial leverage in a highly cyclical industry, and intense competition among leading players especially as the market transitions to digital products and services from traditional learning materials. The company's quarterly operating cash flows are affected by the inherent seasonality of the academic calendar. Within its higher education segment, the company's revenue growth continues to be pressured by secular industry challenges, including affordability-driven price compression, open educational resources, rental and used textbooks. There is also a risk of delays in the K-12 state adoption spending because of budgetary constraints and the potential deferrals of purchasing decisions in the coming year.

Nevertheless, McGraw's credit profile continues to garner support from its strong brand, good market position, long-standing relationships with education institutions, proprietary content developed through long-term exclusive relationships with leading authors and broad range of product offerings. The accelerated digital transformation supports revenue growth for McGraw and lays a pathway for a more efficient cost structure in the longer term, with lower inventory levels and lower earnings volatility associated with estimation of future period print returns. Furthermore, a portion of the cost actions taken is expected to be permanent, which will further support the positive trajectory of McGraw's earnings over the next 12-18 months.

While total billings declined 2% for the quarter and 9% for the first half of fiscal 2021 relative to prior year driven by the cyclical K-12 business, cost reductions and digital billing growth contributed to adjusted EBITDA growth of 4% and 1% for the same periods, respectively. Moody's expects that earnings and cash flow will continue their growth trajectory (estimated at high single percent growth rate over the next 12-18 months) even on revenues that are flat to declining in the low single digit percent range. As a result of McGraw's solid operating performance, Debt/Cash EBITDA declined to 6.4x for LTM 9/2020, about a turn lower than for LTM 12/2019 when Debt/Cash EBITDA was 7.3x (both metrics Moody's adjusted). Moody's now expects Debt/Cash EBITDA (including Moody's adjustments) to approach 6x for FYE 3/2021 and 5.2x by the end of FYE 3/2022, supported by EBITDA improvement.

McGraw's has good liquidity supported by its sizable cash balance (approximately $391 million proforma for the refinancing), and the $150 million extended Accounts Receivables commitment in addition to a newly extended revolving credit facility. The revolver provides $260 million of external liquidity through November 2023 and an incremental $25 million (for a total of $285 million) through May 2021. Moody's projects that the company's cash on hand and internally generated cash flow will be sufficient to fund the company's highly seasonal cash flow and the 1% required annual term loan amortization and other basic cash needs.

The stable outlook reflects Moody's expectations for steady improvement in leverage with Debt/cash EBITDA moving closer to the 5.2x -- 6x range (Moody's adjusted), cash flow growth in the high single percent rate and good liquidity.

STRUCTURAL CONSIDERATIONS

The B2 ratings on the new first lien senior secured credit facilities (revolver and term loan) and the B2 rating on the $25 million unextended senior secured revolver and $27 million term loan (due May 2021 and May 2022, respectively) benefit from its senior position in the capital structure, resulting in a one-notch uplift from the CFR. Both credit facilities benefit from subordination of the $687 million junior priority secured notes due November 2024 and of the $54 million unsecured note stub due May 2024. The junior priority secured notes are rated Caa2 and subordinated to the first lien senior secured credit facilities and $150 million receivables facility and have a senior position relative to the $54 million remaining unsecured notes. Though the remaining unsecured notes are rated Caa2, the same as the junior priority secured notes, Moody's expects a lower recovery for the unsecured notes in a default scenario as reflected in the LGD assessment of LGD6 as compared to LGD5 for the junior priority notes.

ESG CONSIDERATIONS

The key social risks in the education publishing sector lie in evolving demographic and societal trends and particularly in the way students choose to study and consume learning materials. As affordability of textbooks and learning materials are important to students and higher education institutions, less expensive alternatives to print textbooks emerged. This social trend resulted in a multi-year precipitous decline in average spend per student on learning materials. Publishers, including McGraw, are responding by growing digital offerings that provide extra value to students at a lower average cost per unit.

The rapid move to a virtual classroom during the coronavirus pandemic has accelerated advances in online courseware delivery that might have taken much longer before the pandemic. Higher Education institutions and K-12 schools are adapting to digital learning products and integrating them into courseware. This transformation supports digital revenue growth for McGraw and lays a pathway for a more efficient cost structure in the longer term.

Governance risks we consider in McGraw's credit profile include an aggressive financial strategy employed by its financial sponsor. Apollo's controlling shareholder position provides it with the ability to make unilateral decisions regarding financial policy, and there is the risk that McGraw will issue incremental debt to fund large acquisitions or another sizable distribution to enhance equity returns. The company has historically raised debt to fund shareholder returns, while increasing leverage in a highly cyclical industry.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Ratings could be upgraded if McGraw is able to consistently grow revenue and demonstrate earnings growth resulting in debt-to-cash EBITDA (Moody's adjusted) being sustained comfortably below 5x and is committed to operating at that leverage level. Good liquidity with cash balances being more than sufficient to cover outflows including seasonal working capital swings and with free-cash flow-to-debt being sustained in the mid- single-digit percentage range or better, would also be needed for an upgrade.

Moody's defines cash EBITDA as EBITDA with cash prepublication costs expensed, adjusting for deferred revenue and including Moody's standard accounting adjustments.

The ratings could be downgraded if market conditions or competitive pressures lead to earnings decline, resulting in debt-to-cash EBITDA sustained above 6.5x (Moody's adjusted) or free cash flow turning negative. A weakening of liquidity including through such factors as significant revolver usage, diminishing cash balance or elevated refinancing risk, would also pressure the ratings. Aggressive financial policy, including debt-funded acquisitions or distributions to owners, could also lead to a downgrade.

The principal methodology used in these ratings was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

McGraw Hill LLC is a global provider of educational materials and learning services targeting the higher education, K-12, professional learning and information markets with content, tools and services delivered via digital, print and hybrid offerings. McGraw Hill LLC LTM 9/2020 GAAP revenue and billing were approximately $1.5 billion and $1.6 billion, respectively.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, 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 issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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.

Dilara Sukhov, CFA
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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