UPDATE 1-Moody's may cut Riverdeep unit as auditors resign

(Adds Riverdeep comment in paragraphs 4-6)

LONDON, Feb 22 (Reuters) - Moody's Investors Service said on Thursday it might cut the ratings of educational publisher Riverdeep Interactive Learning USA Inc. after Ernst & Young resigned as auditors of the company's parent group, Riverdeep.

Riverdeep last year agreed to buy Boston-based textbook publisher Houghton Mifflin for $1.75 billion, and is still working to complete the deal.

A source familiar with the matter told Reuters last week the company was also looking at bidding for the education arm of Reed Elsevier (REL.L).

Riverdeep said in a statement that it had notified stakeholders and creditors, and that the issue arose over the treatment of a contract with a "long-standing customer" of the company.

"Corrective action was taken immediately, which has resulted in an immaterial financial adjustment to the unaudited figures for the first three quarters of 2006, representing less than 0.5 percent of the combined group turnover," Riverdeep said.

It said there was no impact on the financial performance and expectations of the group.

Moody's said it might cut the B1 rating on a $1.62 billion senior secured term loan, and withdrew its B1 rating on a $250 million add-on to that loan as the company has decided to postpone the increase.

The ratings agency said it expected to complete its rating review once it had received audited financial statements, which it said the company expected on or before March 31.

The $250 million add-on was planned to partially refinance the $1.07 billion bridge facility put in place at the time of the Houghton Mifflin acquisition, Moody's said earlier in February.

Ernst & Young wrote to Riverdeep on Jan. 31 to resign as auditors of Riverdeep Group Ltd., a copy of the letter filed with the Irish Companies Registration Office shows.

"As a result of incorrect representations made to us by the company's parent in respect of a material contract, the professional relationship between us and the company has irretrievably broken down and we have concluded that we cannot continue to act as the company's auditors," Ernst & Young said.