RPT-Fitch Affirms Reed Elsevier at 'A-'; Outlook Stable

Fri Feb 28, 2014 2:10am EST

Feb 28 (Reuters) - 3(The following statement was released by the rating agency)

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.

As the leading provider of scientific, technical and medical (STM) journals, Reed benefits from a stable, subscription-based revenue stream which is the main source of group profit (47% of adjusted operating profit). Other diverse business units also contribute growth and profitability. Reed's rating is underpinned by healthy and visible cash flow generation, coupled with a conservative financial profile. However, Reed's funds from operations (FFO) adjusted net leverage is expected to rise from around 2.3x at end-2013 with increased shareholder remuneration, and as cash tax payments increase. Financial headroom remains limited and the affirmation and Stable Outlook reflect Fitch's expectations that management will take a conservative approach to shareholder remuneration and acquisitions so that FFO adjusted net leverage stays within Fitch's downgrade threshold of 2.5x.

KEY DRIVERS

Provider of Unique Information

Reed operates a number of subscription-based information companies, which end-users are dependent on. These include scientific journals, insurance risk data and proprietary legal information platforms. The STM publishing sector continues to be relatively immune from wider structural changes that have negatively impacted the news, directories and wider publishing market. This provides Reed with a stable operating profile of embedded niche businesses with limited potential for disruption in the medium term

Balanced, High Quality Portfolio

Concerns over the legal business have receded while other segments, notably the Risk Information business (now around 25% of adjusted operating profits), are continuing to expand; (7.8% underlying growth in Risk for 2013). This has helped Reed further its transition to subscription and electronic-based revenues, rather than the traditional publishing streams of advertising and print sales. The restructuring within the Reed Business Information segment has also aided this evolution as many trade magazines have been divested. Print sales now constitute less than 20% of overall revenue, down from 52% in 2005.

Continued Share Buybacks May Impact Credit Profile

While Reed plans to buy back shares (GBP600m in 2014), and pay progressive dividends (2013 full year dividend per share +7% growth at Reed Elsevier PLC), the company has maintained a conservative lease and pension adjusted leverage ratio of near 2.1x. However, rising cash taxes and further buybacks could increase leverage and reduce Reed's financial flexibility within the context of a 'A-' rating.

New Business, New Competition

Reed's continued drive into data-related products has been positive for the rating. However, the company now faces new threats from established data and software firms. Reed will need to compete aggressively for talent as well as constantly innovate to provide new tools and analytics to clients. As big data becomes more central to information provider businesses, Reed will have to compete with small starts ups, which can be more nimble than larger companies. Privacy regulation may also prevent effective use of data if certain information cannot be used for commercial purposes.

Open Access Publishing

Increased media coverage coupled with mandated open access for certain research grants implies a difficult climate for traditional STM publishers. However, open access continues to be a niche alternative to the traditional subscription journal. Fitch believes there could be pricing pressure in the medium term if open access gains a greater portion of high quality published research. However, the operating margins under existing open access journals are significant and a wider movement to such models may see a transition in who pays, rather than a steep reduction in margins. Certain types of open access publishing, notably those tied to an embargo period, may become a bigger worry if restriction periods are limited to six months or less, which may reduce exclusivity and pricing power for Reed's journals, especially among small or regional universities.

RATING SENSITIVITIES

Negative:

- Negative rating action could occur if FFO adjusted net leverage exceeds 2.5x over a sustained period.

- 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 GBP132m at the end of 2013. An undrawn USD2bn credit facility, available until June 2018, is used to backstop GBP229m of commercial paper (at end 2013). Reed has sufficient liquidity to cover debt maturing until the end of 2017.

FULL LIST OF RATING ACTIONS

Reed Elsevier PLC and Reed Elsevier NV:

Long-term IDR: affirmed at 'A-'; Outlook Stable

Short-term IDR: affirmed at 'F2'

Elsevier Finance SA

Senior unsecured notes: affirmed at 'A-'

Senior unsecured 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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