TEXT - Fitch cuts McGraw-Hill's issuer default rating to 'BBB+'

Thu Feb 7, 2013 5:12pm EST

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Feb 7 - Fitch Ratings has downgraded The McGraw-Hill Companies, Inc.'s
 (McGraw-Hill), Issuer Default Rating (IDR) to 'BBB+' from 'A-'. Fitch
has also placed the company's ratings on Rating Watch Negative. A full list of
rating actions follows at the end of this release.

Regulatory/litigation-related event risk has historically been incorporated 
within the ratings; however, recent events have heightened this risk. The 
increased uncertainties are no longer consistent with an 'A-' rating. 

The downgrade and Rating Watch Negative placement reflect:

--The suit filed by the Department of Justice (DOJ) against McGraw-Hill and its 
S&P subsidiary;

--The related state attorney general suits and the risk for additional suits; 
and

--The potential impact these suits may have on the operations of the S&P 
business segment.

The ratings reflect McGraw-Hill's prominent business franchises; the company's 
conservative balance sheet; strong margins (EBITDA margins around 29%); and free
cash flow characteristics. Fitch recognizes the diversification of McGraw-Hill 
Financial, with 55% of revenues and 45% of EBITDA coming from Capital IQ, S&P 
Dow Jones Indices, Commercial and Commodities business segments. S&P makes up 
the remaining revenue and EBITDA components. This diversification and strength 
of these other businesses provides McGraw-Hill the flexibility to absorb 
negative performance or changes within the S&P business.

Fitch believes that the company maintains significant financial flexibility to 
absorb a material negative financial outcome from the DOJ suit or from other 
suits and maintain investment grade ratings. As of September 2012, unadjusted 
gross leverage was 0.7x, providing balance sheet flexibility. In addition, near 
term liquidity will also be supported by proceeds from the sale of the 
McGraw-Hill Education unit ($1.9 billion of estimated net proceeds, net of taxes
and certain closing adjustments). 

Fitch makes no assumption regarding the timing, course of litigation or 
potential for settlement. Fitch expects McGraw-Hill to continue to deploy FCF 
towards acquisitions and share repurchases. Continued share repurchases during a
period of heightened risk of a material payment could pressure the ratings.

Sensitivity

--Ratings may be downgraded if Fitch believes that the risk of monetary 
penalties would drive leverage over 2.5 times (x). 

--Material disruption, negative operating results or a business model changes at
the S&P business that materially impacted margins and FCF would pressure the 
ratings. 

--If the DOJ lawsuit and other potential lawsuits are resolved, the company's 
business profile is unchanged, and Fitch expects financial leverage to run below
1.5x, the rating could be considered for an upgrade. 

 

Liquidity and Leverage:

The company has historically and is expected to continue to maintain strong 
liquidity. As of Sept. 30, 2012, liquidity consisted of cash and cash 
equivalents of $1.2 billion ($579 million of this cash was held in the U.S.) and
full availability under its $1.2 billion commercial paper (CP) program (backed 
by McGraw-Hill's $1.2 billion bank credit facility due July 2013). The company 
has ample cushion inside of the credit facilities' 4.0x indebtedness-to-cash 
flow ratio. September 2012 latest 12 months (LTM) post divided FCF was $565 
million. Fitch expects post divided FCF to remain healthy in the range of $400 
to $600 million.

Fitch notes that in December 2012 McGraw-Hill announced a special dividend 
totaling approximately $696 million and was payable on Dec. 27, 2012. In 
addition, the company had a $400 million senior unsecured note mature in 
November 2012. Liquidity as of September 2012, coupled with fourth quarter cash 
generation, provided the company sufficient liquidity to make these payments. 

In addition to existing liquidity, McGraw-Hill is expecting to receive $2.25 
billion in cash and a $250 million unsecured note from the purchaser upon the 
closing of the sale of McGraw-Hill Education, which is expected to close early 
2013, subject to regulatory approval and customary closing conditions. The 
company intends to use the net proceeds from the sale to fund share repurchases,
make tuck-in acquisitions and pay off any short-term borrowings. 

Fitch believes that the company does not intend to materially increase leverage 
for shareholder friendly actions. Fitch expects unadjusted gross leverage to be 
managed below 1.5x. Leverage is expected to increase from 0.7x upon the 
separation of the education business (due to the loss of EBITDA); however, Fitch
expects pro forma leverage to be approximately 1x at the end of 2012. Total 
gross debt stood at $1.2 billion as of September 2012.

Fitch has taken the following rating actions on McGraw-Hill:

--IDR downgraded to 'BBB+' from ' A-'; 
--Short-term IDR 'F2'; 
--Commercial paper 'F2'; 
--Senior unsecured downgraded to 'BBB+' from 'A-'.
The ratings have been placed on Rating Watch Negative. Prior to today's actions 
the Rating Outlook was Stable
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