TEXT - Fitch affirms Reed Elsevier ratings

Wed Dec 19, 2012 11:48am EST

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Dec 19 - Fitch Ratings has affirmed Reed Elsevier PLC's and Reed Elsevier
NV's (together, Reed) Long-term Issuer Default Ratings (IDRs) at 
'A-'. The Outlook is Stable. A full list of rating actions is below.

Reed's credit profile is underpinned by good and visible cash flow generation 
from three- to five- year contracts at its Elsevier business unit, the world's 
leading provider of scientific and medical information, which accounts for 
almost half of Reed's adjusted operating profit. Other diverse business units 
also contribute to growth and profitability, giving Reed a stable and resilient 
operating profile. With funds from operations adjusted net leverage close to the
key 2.5x threshold (2.5x at the end of 2011), Fitch expects Reed to reduce 
leverage by the end of 2013 as post-dividend free cash flow (FCF) should remain 
positive under most downturn scenarios modelled by the agency.

KEY DRIVERS

- Strong financial profile

Reed's ratings reflect the company's strong cash flow generating ability, sound 
balance sheet and its consistent and conservative financial policies. At 
end-H112, Reed's lease and pension adjusted net debt/EBITDA ratio was 2.3x (2.3x
at end-2011) with management targeting leverage consistent with a solid 
investment grade credit rating. However, current financial headroom remains 
limited and the affirmation of the 'A-' rating with a Stable Outlook reflects 
Fitch's expectations that deleveraging will continue during 2013.

- Resilient operating performance

Reed's 9M2012 underlying revenue growth was +4% (+3% excluding the effect of 
biennial exhibition cycling) with all five business areas contributing to 
underlying growth. This underlines the resilience of the company's operations to
withstand the drag from weak macroeconomic conditions. In the company's Q312 
management statement, Reed confirmed it is on track to deliver underlying 
revenue and profit growth expectations for 2012. Ongoing disposals may temper 
the company's reported revenue growth, but Fitch believes that these adjustments
to Reed's portfolio of businesses are positive as Reed focuses on segments with 
good growth prospects and sustainable profitability.

- Sustainable competitive position

Reed has a diverse mix of market-leading businesses in segments with good 
long-term growth prospects, despite continued competitive pressure in the US 
legal services market. Fitch recognises that there are significant barriers to 
entry in Reed's core businesses. Reed benefits from selling a high proportion of
subscription-based "must-have" products, which are constantly being further 
integrated into clients' businesses as embedded IT solutions.

- Pricing risks

There have been recent debates in the academic community, the principal 
customers for scientific, technical and medical publications, around different 
pricing models and free access to research. A change in pricing models could 
negatively affect Reed's profit margins. In July 2012, the European Commission 
backed calls for free access to research. The fact that publicly funded research
makes up a small percentage of university budgets somewhat mitigates this risk. 
Fitch will treat any significant change in pricing models as event risk.

WHAT COULD TRIGGER A RATING ACTION?

Negative:

- A negative rating action could occur if funds from operations adjusted net 
leverage exceeds 2.5x over a sustained period of time

- A marked deterioration in Reed's operating environment

Positive:

- Positive rating action is currently unlikely, unless Reed adopts more 
restrictive financial policies with respect to financial leverage and 
shareholder remuneration

LIQUIDITY AND DEBT STRUCTURE

Reed has a strong liquidity position with cash and equivalents of GBP425m at 
H112. An undrawn USD2bn credit facility, available until June 2015, is used to 
backstop USD823m of commercial paper (at H112). In August, Reed issued EUR550m 
of eight-year term debt at a coupon of 2.5%. A further issue of about USD560m of
10-year term debt with a coupon of 3.125% was used to retire around USD300m of 
high coupon term debt and reduce commercial paper borrowings. Reed has enough 
liquidity to cover debt maturing till the end of 2015.

FULL LIST OF RATING ACTIONS

Reed Elsevier PLC and Reed Elsevier NV:

Long-term IDR: affirmed at 'A-' with a Stable Outlook
Short-term ST IDR: affirmed at 'F2'

Elsevier Finance SA
Senior unsecured notes: affirmed at 'A-'
Senior unsecured notes used as security for notes issued by ELM BV: affirmed at 
'A-'
Commercial Paper: affirmed at 'F2'

Reed Elsevier (Investments) plc.
Senior unsecured notes: affirmed at 'A-'
Commercial Paper: affirmed at 'F2'

Reed Elsevier Capital Inc.
Senior unsecured notes: affirmed at 'A-'

Reed Elsevier Inc.
Senior unsecured notes: affirmed at 'A-'
Commercial Paper: affirmed at 'F2'

Reed Elsevier Properties SA
Commercial Paper: affirmed at 'F2'
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