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
