TEXT - Fitch affirms Reed Elsevier ratings
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'