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
--The related state attorney general suits and the risk for additional suits;
--The potential impact these suits may have on the operations of the S&P
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.
--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
--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