NEW YORK--(BUSINESS WIRE)--Fitch Ratings maintains McGraw Hill Financial, Inc.'s (McGraw Hill Financial) 'BBB+' Issuer Default Rating (IDR) on Rating Watch Negative. A full list of ratings follows at the end of this release.
The ratings and Rating Watch Negative reflect:
--The suit filed by the U.S. Department of Justice (DOJ) against McGraw Hill Financial and its S&P Ratings subsidiary;
--The related state attorneys general suits;
--The event risk associated with the Wells Notice issued by the U.S. Securities and Exchange Commission (SEC) related to six CMBS transactions rated by S&P Ratings in 2011.
KEY RATING DRIVERS
The ratings are supported by the company's conservative balance sheet; strong EBITDA margins (around 36%-38%); and strong free cash flow characteristics. Fitch recognizes the diversification of McGraw Hill Financial, with approximately 55% of revenues and 49% of EBITDA coming from S&P Capital IQ, S&P Dow Jones Indices, Commercial and Commodities business segments. S&P Ratings makes up the remaining revenue and EBITDA components. This diversification and strength of these other businesses provides McGraw Hill Financial the flexibility to absorb negative performance or changes within the S&P Ratings business.
Fitch believes McGraw Hill Financial possesses significant financial flexibility to absorb a material negative financial outcome from the DOJ suit and/or other lawsuits while maintaining its investment grade ratings. As of June 2014, unadjusted gross leverage was 0.4 times (x) and total gross debt stood at $800 million ($400 million due in 2017 and $400 million due in 2037). Fitch believes that the company does not intend to materially increase leverage for shareholder friendly actions.
Under various scenarios Fitch has modeled, which include assumptions for investments in the business (including acquisitions and capital expenditures), Fitch believes that leverage could temporarily exceed 2.5x unadjusted gross leverage and maintain current ratings. Based on current leverage and debt levels, this translates to approximately $4 billion in additional debt. Further, based on Fitch's expectations for EBITDA over the next two years this additional amount increases to approximately $5 billion.
Fitch makes no assumption regarding the timing, course of litigation or potential for settlement. Fitch expects McGraw Hill Financial to continue to deploy FCF towards acquisitions and share repurchases. Continued share repurchases during a period of heightened risk of a material legal or regulatory payment could pressure the ratings.
The company has historically and is expected to continue to maintain strong liquidity. As of June 2014, liquidity consisted of cash and cash equivalents of $1.6 billion (approximately $647 million held in the U.S.) and full availability under its $1 billion commercial paper (CP) program (backed by McGraw Hill Financial's $1 billion bank credit facility due June 2017). The company has ample cushion inside of the credit facilities' 3.25x indebtedness-to-cash flow ratio.
June 2014 latest 12 months (LTM) FCF, before regular dividends, was $871 million ($556 million after $315 in dividends). Fitch expects FCF before dividends to remain healthy in the range of $900 million to $1 billion (FCF after dividends are expected to range from $570 to $670 million). CME Group Inc. and CME Group Index Services LLC will have the right to put their 27% interest in the indices joint venture to McGraw Hill Financial starting in 2018. This put right is currently valued at approximately $810 million. The risk of this put is accommodated within the ratings, given the company's liquidity and FCF generation.
Over the last six months, revenues have grown 6%, with subscription revenues up 7% and non-subscription/transaction revenues up 5%. Most of McGraw Hill Financial's divisions have grown revenues, with S&P Ratings revenues up 6%, S&P Capital IQ up 6%, Indices up 13%, and Commodities up 11%. The Commercial segment (JD Power and Construction) was down 5%, primarily driven by the divesture of Aviation Week. Fitch calculates consolidated EBITDA margins remain solid at approximately 38%.
Fitch expects 2014 revenues to grow in the mid-single digits and EBITDA margins to be in the 36% to 37.5% range. Fitch's expected EBITDA margins conservatively reflect the risk of additional litigation related costs.
The company has noted that it is seeking strategic alternatives for its Construction business. This is a relatively small business unit, accounting for less than 5% of revenues and less than 2.5% of EBITDA (Fitch's estimates). A divesture of this business unit is not expected to have a material impact on the credit profile.
Ratings may be upgraded when:
--The DOJ and other lawsuits (including the state attorneys general suits) are resolved;
--The company's business profile is unchanged from the current profile; and
--The cumulative effect of any judgments/settlements, acquisitions and share repurchases on the credit profile continue to reflect a conservative balance sheet and financial policy, which may include sustained leverage under 1.5x.
Fitch may consider removing the rating Watch Negative and assigning a Stable Outlook upon a resolution of the recent Wells Notice and/or Fitch's comfort that the Wells Notice would not result in a material negative outcome for the company. This potential Watch/Outlook change is driven by McGraw Hill's financial flexibility and strong FCF generating ability noted above. Any changes to these characteristics could alter this potential outcome.
Negative rating actions could occur if:
--Monetary penalties or settlements drove leverage over 2.5x and Fitch believed such elevated leverage levels would be maintained;
--Material disruption, negative operating results or a business model change at the S&P Ratings business that materially impacted margins and FCF.
Fitch maintains the following ratings for McGraw Hill Financial on Rating Watch Negative:
--Short-term IDR 'F2';
--Senior unsecured 'BBB+';
--Commercial paper 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology' May 28, 2014.
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage