Aug 9 - Fitch Ratings has affirmed The McGraw-Hill Companies, Inc.'s
(McGraw-Hill), Issuer Default Rating (IDR) at 'A-' and revised the
Rating Outlook to Stable from Negative. A complete list of rating actions
follows at the end of this release.
The Stable Outlook reflects Fitch's belief that the company does not intend to
materially increase leverage for shareholder friendly actions. While debt funded
acquisitions may be executed, Fitch believes that most acquisitions will be
small tuck-in acquisitions accommodated within the company's FCF generation and
Fitch's expectation that unadjusted gross leverage would be managed below 1.5x.
There is tolerance for gross leverage to exceed 1.5x due to an acquisition, as
long as the company dedicated FCF towards reducing debt and bringing leverage
back below rating targets within 12 to 18 months. As of June 2012, unadjusted
gross leverage was 0.7x. Fitch expects leverage to increase upon the separation
of the education business (due to the loss of EBITDA); however, Fitch expects
pro forma leverage to remain under 1x at the end of 2012.
The ratings reflect the competitive environment within the financial
information/services subsector. The ratings reflect McGraw-Hill's prominent
business franchises. In addition, the company's strong margins (EBITDA margins
around 32% at McGraw-Hill Financial) and free cash flow characteristics provided
it with the capacity to weather the economic downturn. Fitch's conservative base
case expects mid-single digit revenue and EBITDA growth in 2012.
The Ratings reflect the company's plan to separate the education business.
McGraw-Hill Financial is expected to maintain all of the existing debt and cash.
In addition, it will receive a $500 million dividend from McGraw-Hill Education.
While the pension liabilities will remain at McGraw-Hill Financial, the funding
of contributions towards the underfunded balance of $329 million as of 2011 year
end can be accommodated within the company's cash flow generation.
The rating incorporates several other overhangs on the credit profile which
Fitch has previously commented on, namely regulatory and litigation related
uncertainties. Fitch believes McGraw-Hill carries a meaningful level of
liquidity providing financial flexibility to address regulatory and/or
litigation risk. In addition, given the time it takes for legal and regulatory
matters to be processed (case can takes years before any settlement is reached),
McGraw-Hill can preserve additional liquidity in the event it believes that a
case may result in a material cash payment.
The ratings are not dependent on a rebound in structured finance revenues.
Key Rating Drivers:
--Given the regulatory and litigation risk overhang, Fitch does not expect any
positive rating momentum in the near term.
--The ratings could be negatively affected if regulatory and litigation-related
event risks accelerate or are combined with material operating or financial
As of June 30, 2012, liquidity consists of cash and cash equivalents of $836
million and full availability under its $1.2 billion commercial paper (CP)
program (which are backed by McGraw-Hill's $1.2 billion bank credit facility due
2013). The company has ample cushion inside of the credit facilities' 4.0 times
(x) indebtedness-to-cash flow ratio. June 2012 latest 12 months (LTM) FCF was
Fitch recognizes the risk associated with the potential put right the CME Group
has in regards to its 27% ownership of the S&P/Dow Jones Indices joint venture,
starting in 2018 (earlier if McGraw-Hill is sold to a competitor of the CME
Group). As of June 2012, the put right is estimated at approximately $800
million. McGraw-Hill has sufficient liquidity (including access to credit
markets) to address this potential put.
Total gross debt stood at $1.2 billion as of June 2012 (the company was in a net
debt position of approximately $460 million).
Fitch has affirmed McGraw-Hill's rating as follows:
--IDR at 'A-';
--Short-term IDR at 'F2';
--Commercial paper at 'F2';
--Senior unsecured at 'A-'.
The rating Outlook is Stable.
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. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology