Dec 13 -
Summary analysis -- Reed Elsevier PLC ----------------------------- 13-Dec-2012
CREDIT RATING: BBB+/Stable/A-2 Country: United Kingdom
Primary SIC: Periodicals
Mult. CUSIP6: 758205
Mult. CUSIP6: 758212
Credit Rating History:
Local currency Foreign currency
12-Dec-2008 BBB+/A-2 BBB+/A-2
12-Jul-2001 A-/A-2 A-/A-2
Standard & Poor's Ratings Services analyses the ratings on U.K.-based Reed Elsevier PLC and Netherlands-based Reed Elsevier N.V. --the joint parent companies of the Reed Elsevier combined businesses (together, Reed)--on a consolidated basis.
The ratings reflect our assessment of Reed's business risk profile as "strong" and its financial risk profile as "intermediate."
Our assessment of Reed's business risk profile reflects the group's strong market position in its online, electronic, and print-based publishing activities, along with its growing information solutions businesses. These strengths are partly offset, however, by the group's exposure to variations in business confidence and to economic cycles in general, especially to cyclical advertising and promotion markets at the group's Reed Business Information and Reed Exhibitions divisions.
Our assessment of Reed's financial risk profile mainly reflects strong cash conversion and a supportive financial policy which, we believe, could offset acquisitions and shareholder returns.
S&P base-case operating scenario
We continue to expect Reed's revenues to grow organically in the low single digits in percentage terms in 2012, supported by the group's 4% underlying growth rate recorded in the first nine months of 2012 and by management's indications that revenue growth for the full year 2012 remains on track with its earlier guidance for underlying revenue and margin growth versus last year's figures. We believe organic revenue growth may slow in 2013, essentially owing to a very weak economic outlook for the year in Europe , our view of increasingly sluggish prospects for the Legal & Professional business in the region during the period, and a likely high 2012 comparison base in the Risk Solutions business.
We base our scenario on our latest economic forecast for a mild recession in 2012 and flat GDP growth in 2013 in the eurozone (see "The Eurozone's New Recession--Confirmed," published Sept. 25, 2012, on RatingsDirect on the Global Credit Portal). Standard & Poor's economists foresee a 33% chance of a severe recession next year in Europe.
On the upside, we believe at this stage that a contraction of Reed's underlying revenues next year is unlikely. The good revenue and earnings visibility provided by the high level of recurrent subscriptions in the group's Science, Technology & Medical publishing business, and at its Risk Solutions and Legal businesses, which together account for about 80% of revenues and EBITDA, are key supports for our base-case scenario for Reed in 2012 and 2013.
Under our revenue growth assumptions for 2012, we believe that Reed could post an improved EBITDA margin at year-end 2012. This is because we think its cost base will likely grow at a slower pace than revenues, and we don't expect any restructuring costs this year. Reed reported an EBITDA margin (excluding its share of joint ventures' results) of about 29% in 2011, representing a strong improvement from 27.3% in 2010, thanks to the absence of exceptional restructuring costs at the Reed Business Information unit. Given our assumptions of low-single-digit revenue growth in 2013, we believe that Reed should post a stable EBITDA margin in the year.
S&P base-case cash flow and capital-structure scenario
Reed's ratio of Standard & Poor's-adjusted debt to EBITDA slightly improved to 2.8x at year-end 2011, compared with 2.9x on Dec. 31, 2010, thanks to a widening EBITDA margin and solid free cash flow generation. Under our base-case scenario for Reed, we expect this leverage ratio to continue decreasing by year-end 2012. However, share buyback activity could somewhat limit improvement in the ratio, because we understand the group intends to use gross divestment proceeds to mitigate earnings per share dilution deriving from disposals. Reed indicated in its third-quarter trading update in early November 2012 that it intended to buy back shares for about GBP250 million (EUR310 million) this year, of which it had already repurchased GBP158 million (EUR193 million) at the end of the third quarter. We continue to anticipate that the group's leverage will remain consistent with our adjusted debt-to-EBITDA guidance of about 3x for the 'BBB+' rating over the next two years.
The group's cash flow generation and cash conversion continue to support its financial risk profile. Reed reported ratios of adjusted free cash flow to debt of about 23.6% on Dec. 31, 2011, and adjusted discretionary cash flow to debt of about 11.5% on the same date, reflecting a reported cash conversion of EBITDA into free operating cash flow of about 55% in 2011 (from 64% in 2010).
Our short-term rating on Reed is 'A-2'. We view the group's liquidity as strong under our criteria.
Relevant aspects of the group's liquidity position, based on our criteria, are as follows:
-- We anticipate that the group's sources of liquidity--including cash, funds from operations (FFO), and credit facility availability--will exceed its uses by about 1.8x over the next couple of years.
-- We believe that net liquidity sources would be positive even if EBITDA dropped 30%.
-- Key liquidity sources are cash and cash equivalents, which stood at GBP425 million as of June 30, 2012, and Reed's $2 billion committed revolving credit facility (RCF), fully undrawn at the same date. The RCF is due in June 2015 after the group exercised the second of two one-year extensions, and provides back up for Reed's various commercial paper (CP) programs.
-- Another important source and support of liquidity is the group's solid free cash flow generation and conversion. Reported free and discretionary cash flows represented about 55% and 26%, respectively, of EBITDA in 2011. We believe that Reed will maintain these conversion levels in 2012 and 2013.
-- Additionally, debt maturities over this time horizon are manageable, in our opinion. As of June 30, 2012, Reed reported GBP1.2 billion in short-term debt, mostly composed of $823 million of CP. Reed smoothed its debt maturity profile in early November 2012 by launching private exchange offers for its outstanding 2014 and 2019 notes for up to $600 million of new 3.125% notes due 2022. The tender offers resulted in a reduction of about $78 million of outstanding 2014 notes, and about $221 million of outstanding 2019 notes. In exchange for the 2014 and 2019 notes, the group issued about $311 million of 2022 notes and paid about $75 million in total to bondholders who exchanged. The new 2022 bonds are in addition to the $250 million 2022 notes already issued--with the same terms--in October 2012. After the exchanges, the remaining level of outstanding principal of 2014 and 2019 notes were $461 million and $729 million, respectively, and the aggregate amount of the new 2022 notes reached about $561 million.
-- We believe that covenant compliance could weather, for example, a 30% drop in EBITDA. The group's RCF includes financial covenants measured at six-month reporting intervals. The headroom under these covenants should continue to be adequate over the next two years, in our view.
-- Because of its high conversion of EBITDA to discretionary cash flow), Reed could absorb high-impact, low-probability shocks in our opinion.
-- The group appears to have well-established and solid relationships with its banks, based on its track record.
The stable outlook reflects our view that Reed's revenues will continue to grow in the low single digits in percentage terms and that the group's EBITDA margin will improve or remain broadly stable over the next two years. The current rating further reflects our assumption that Reed's financial policy will support moderate deleveraging in the coming quarters and that the group will therefore manage to maintain cash flow protection ratios that we consider adequate for the ratings. At the 'BBB+' rating level, we view adjusted free cash flow to debt of about 20% and adjusted debt of about 3.0x adjusted EBITDA as commensurate for the ratings.
We could lower the ratings if Reed's operating performance fell materially below our expectations, or if it adopted a markedly more aggressive financial policy. Any shift in financial policy through sizable debt-funded acquisitions, or substantial shareholder returns would likely result in credit metrics remaining persistently below our expectations for the ratings.
We view an upgrade as relatively unlikely in the next few years given our anticipation of moderate organic growth and progressive improvement in credit metrics already factored into the ratings. A positive rating action could, however, materialize if the group posted significantly better-than-expected revenue and EBITDA growth and adopted a consistently more conservative financial policy, to consequently show improvement in its financial profile. We would view adjusted free cash flow to debt of over 25% and adjusted debt of under 2.5x adjusted EBITDA as commensurate with higher ratings.
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Principles Of Credit Ratings, Feb. 16, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008