NEW YORK--()--Fitch's ratings of The McGraw-Hill Companies, Inc.'s (McGraw-Hill) are unaffected by McGraw-Hill's announcement of a special dividend. A complete list of ratings follows at the end of this release.
McGraw-Hill announced that it is declaring a special dividend of $2.50 per share, which totals approximately $694 million and is payable on Dec. 27, 2012. This special dividend will supersede McGraw-Hill's previously announced plan to repurchase $200 million in shares during the remainder of the year. The announced special dividend is consistent with Fitch's expectation for McGraw-Hill to deploy cash towards share holder friendly actions and acquisition activity.
Fitch expects the special dividend to be funded with available 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). September 2012 latest 12 months (LTM) FCF was $565 million.
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 ($1.9 billion) 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. As of September 2012, unadjusted gross leverage was 0.7x. Leverage is expected to increase 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.
The rating incorporates several 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.
Key Rating Drivers:
--Given the regulatory and litigation risk overhang, Fitch does not expect any positive rating momentum in the near term.
--A change in the company's financial policy which weakened bondholder protection, including a willingness to materially increase leverage, would pressure ratings.
--The ratings could also be negatively affected if regulatory and litigation-related event risks accelerate or are combined with material operating or financial metric deterioration.
Fitch rates McGraw-Hill as follows:
--Short-term IDR 'F2';
--Commercial paper 'F2';
--Senior unsecured notes and bank facility 'A-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology