(The following statement was released by the rating agency)
NEW YORK, March 08 (Fitch) Fitch Ratings has assigned a 'BB/RR2'
rating to the
$1.05 billion proposed senior secured note offering, due 2021,
Global Education Holding LLC (MHGE) and McGraw-Hill Global
Inc (MHGE Finance; co-issuer of the secured debt). Proceeds of
the notes will be
used to fund the acquisition of McGraw-Hill Education (MHE) by
Apollo Group. A
complete list of ratings follows at the end of this release.
Apollo Group will be acquiring the MHE unit for $2.4 billion.
Apollo intends to
finance the acquisition with $1.05 billion of senior secured
notes, $560 million
in senior secured term loans, a $240 million revolver (for
and will not be drawn on to fund the transaction), and $950
million in cash from
The credit facility and the notes will be pari passu with one
benefit from a first priority lien on all material assets,
including a pledge of
the equity of domestic guarantor subsidiaries and 65% of the
interest of first-tier foreign subsidiaries, subject to certain
The credit facility will be further secured by a pledge of the
of MHGE held by its parent McGraw-Hill Global Education
Intermediate Holding LLC
(Holdings). While the secured notes do not benefit from the
pledge of MHGE's
equity by Holdings, Fitch's believes the value of the security
comes from the
assets of MHGE and its subsidiaries (including the equity pledge
Both the bank facility and the notes will be guaranteed by
existing and future
wholly-owned domestic subsidiaries of MHGE (subject to certain
Holdings and MHE US Holdings, LLC, which is Holdings' parent and
also holds the
equity of the McGraw-Hill School Education Group.
None of the funding provided by this rated transaction will be
to the funding of the acquisition of McGraw-Hill's School
Education Group (SEG;
K-12 education unit). The SEG assets will be separated from
MHGE. EBITDA was
negative for the SEG segment for the year ended 2012. SEG will
not provide any
guarantee to MHGE or MHGE's rated instruments. In addition, MHGE
provide any guarantees to the SEG segment.
Covenants for the senior secured notes include a 101% change of
right in the event that more than 50% of the voting control of
MHGE is held by a
person or group, other than permitted holders (as defined); or a
sale, lease, or
transfer of all or substantially all the assets of MHGE and its
a person other than a permitted holder (as defined; includes
Additional debt is primarily limited by a 6.25x total
ratio incurrence test. There are additional debt carve outs,
additional debt, in an amount that does not exceed the greater
of $100 million
or 5% of total MHGE assets by non-guarantor subsidiaries. Also,
up to an
additional $325 million in additional debt secured by the
package may be issued ($2.2 billion limit less proposed
financing of $1.9
billion). Additional secured debt (above the $2.2 billion limit)
is limited by a
secured indebtedness leverage incurrence test of 4.75x.
Restricted payments (and
restricted investments) are primarily limited by a cumulative
credit basket (as
defined; includes an accumulation of 50% of net income among
other add backs).
There is also a general restricted payment basket of the greater
of 3% of total
assets or $60 million.
Covenants for the credit facility are expected to include a net
leverage maximum of 7 times (x), if more than 20% of the
revolver is drawn.
Also, there are mandatory credit facility repayments including a
1% per annum
term loan amortization and a 50% excess cash flow sweep (as
down to 25% and 0% when the first lien leverage ratio reaches
1.5x and 0.75x
LIQUIDITY, FCF AND LEVERAGE
Based on MHGE's reported 2012 year end results, Fitch calculates
EBITDA of $334 million, resulting in pro forma leverage of 4.8x.
plate EBITDA does not add back certain adjustments made by the
including adjusting for deferred revenue and cost savings
expected in 2013.
Based on Fitch's base case model, with revenues flat to down in
the low single
digits, Fitch expects leverage to remain near 5x in 2013 and
decline in 2014
driven by absolute debt repayment and EBITDA growth.
The ratings reflect the strong FCF metrics of MHGE. Fitch
estimates 2012 FCF of
approximately $170 million. FCF to debt (pro forma for the
transaction) in 2012
is estimated at 10%; Fitch projects approximately 9% in 2013.
EBITDA to FCF
conversion metrics is expected to be 45% over the next few years
This is in part
driven by the cost reduction initiatives, but absent these
would expect FCF conversion to be around 40% or better.
The ratings reflect Fitch's expectation that FCF will be
dedicated towards debt
reduction and acquisitions. Fitch believes most acquisitions
will be small tuck
While management has not stated a leverage target, Fitch
believes that the
private equity ownership is incentivized to reduce leverage in
order to improve
the prospects of an exit from its investment.
Post the transaction, Fitch expects liquidity to be supported by
proposed $240 million revolver due 2018 and pro forma cash
approximately $90 million.
KEY RATING DRIVERS
The ratings reflect MHGE's business profile: 61% of revenues
education publishing/solutions, 10% of revenues from
content and services, and 29% from international sales of higher
professional education materials. The higher education
publishing market is
dominated primarily by Pearson, Cengage and MHGE. Collectively
publishers make up 75% (according to Monument Information
Resources; provided by
the company), with MHGE holding a 17% market share. This scale
meaningful advantages to these three publishers and creates
barriers to entry
for new publishers.
According to the National Center for Education Statistics U.S.
enrollment in higher education has grown nearly every year, for
the last 50
years. There have been seven years where enrollment declined
each time in the low single digits. Most recently, 2011
slightly, 0.1%. This has been driven by an approximately 3.1%
for-profit university enrollment and 0.2% declines in public
Non-profit private universities were up 1.9%. Fitch believes
enrollment for 2012
was down in the low single digits.
Fitch believes that there could be some near-term enrollment
pressures due to
continued enrollment declines at for-profit universities and the
federal student aid cuts. Long-term, Fitch believes enrollment
will continue to
grow in the low single digits, as higher education degrees
continue to be a
necessity for many employers.
MHGE and its peers have continued to demonstrate pricing power
products. Fitch believes this will continue, albeit at lower
historically. Textbook pricing increases are expected to
materially slow down
and will likely be in the low single digits. Revenue growth will
from the continued growth in volume of digital solution products
pricing increases associated with these digital products as they
The transition from physical education materials to digital
products has been
advancing at a materially faster pace relative to K-12 education
believes that the transition will lead to a net benefit for the
time. Publishers will have the opportunity to dis-intermediate
book sellers, recapturing market share from these segments.
print/digital margins to remain roughly the same, as the both
the discount of
the digital textbook (relative to the print textbook) and the
in the interactive user experience offset the elimination of the
with manufacturing, warehousing, and shipping printed textbooks.
Fitch recognizes the risk of digital piracy, given the age
demographic of higher
education, the current data speeds available on the internet and
ease of finding a pirated text book. A mitigant to piracy risk
development and selling of digital education solutions. The
incorporate homework and other supplemental materials that
require a user's
authentication. The company's strategy is to 'sell' these
products to the
professors, who then adopt this as required material for the
then purchase the digital solution. This strategy has also been
MHGE's peers. It will be vital for the industry to steer
these digital solutions rather than a stand-alone eBook in order
against piracy. Fitch believes that this strategy is sound and
successful. Fitch notes that adoption will be slow due to the
slow to change
nature of many professors.
Fitch expects traditional print revenues to continue to decline
due to growth in
eBooks, near-term cyclical pressures in enrollment, and delays
by professors in
adopting new editions. Under Fitch base case model, Fitch
expects the growth in
digital solutions, custom publishing and eBooks to offset the
revenue declines within the next two to three-years.
The ratings reflect cost savings identified by MHGE,
approximately $86 million
through 2015. Cost reductions include corporate and IT costs
driven by headcount
reductions and outsourcing. Fitch believes this is achievable
historical ownership of MHPI within a conglomerate.
MHGE did not provide audited financial statements. Audited
statements for McGraw-Hill Education LLC were provided, which
combined MHGE and
McGraw-Hill's School Education Group. Unaudited break out of
these two divisions
were provided by management and used by Fitch to assign ratings.
RECOVERY RATINGS ANALYSIS
MHGE's Recovery Ratings reflect Fitch's expectation that the
enterprise value of
the company and, thus, recovery rates for its creditors, will be
maximized in a
restructuring scenario (as a going concern) rather than a
estimates a distressed enterprise valuation of $1.5 billion,
using a 6x multiple
and a post restructuring EBITDA of approximately $250 million.
Fitch's standard 10% administrative claim, Fitch estimates
recovery for the
senior secured instruments of 74%, which maps to the low end of
its 71-90% 'RR2'
range. Issuance of additional secured debt could result in a one
of the issue ratings.
Continued growth in digital revenues coupled with leverage of 4x
or less (on
Fitch-calculated basis) would likely lead to positive rating
Mid to high-single digit revenue declines, which may be driven
by declines or no
growth in digital products (caused by a lack of execution or
professors) would pressure ratings.
Fitch has the following ratings:
--Long-term IDR 'B+';
--Proposed senior secured credit facility (term loan and
revolver) at 'BB/RR2';
--Proposed senior secured notes assigned at 'BB/RR2'.
--Long-term IDR 'B+'.
--Proposed senior secured credit facility (term loan and
revolver) at 'BB/RR2'
(co-issuer to MHGE's credit facility noted above);
--Proposed senior secured notes assigned at 'BB/RR2' (co-issuer
secured notes noted above).
The Rating Outlook is Stable.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Michael Simonton, CFA
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
Additional information is available at 'www.fitchratings.com'.
The ratings above
were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been
compensated for the provision of the ratings.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research
Corporate Rating Methodology
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