Fitch Downgrades McGraw-Hill's IDR to 'BBB+'; Places Ratings on Watch
NEW YORK -- February 7, 2013
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 S&P subsidiary;
--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
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
--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
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.
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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Rolando Larrondo, +1-212-908-9189
Fitch Ratings, Inc.
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