CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) assigned to McGraw Hill Financial, Inc. (MHFI) and removed the IDR, short-term ratings and related issue ratings from Rating Watch Negative. The Rating Outlook is Stable.
Approximately $800 million of debt outstanding as of Sept. 30, 2014 is affected by Fitch's rating action. A full list of ratings follows at the end of this release.
Fitch's rating action follows the company's announcement that its Standard & Poor's Ratings Services (S&P) business unit has entered into settlement agreements with the SEC and concurrent settlement agreements with the Attorneys General of New York and Massachusetts related to, among other things, six CMBS transactions rated by S&P during 2011 and two additional U.S. conduit/fusion CMBS transactions from the same timeframe. In accordance with the settlement terms, the SEC ordered S&P to pay $58 million. Additionally S&P agreed to pay a total of $19 million to the state of New York and the Commonwealth of Massachusetts. The settlement terms are final and not subject to court approval.
From Fitch's perspective the settlement terms will not materially affect MHFI's or S&P's operating profile. Under the settlement terms, S&P Ratings will also be temporarily restricted from rating new U.S. conduit/fusion CMBS transactions until Jan. 21, 2016.
Fitch notes that the suit filed by the U.S. Department of Justice (DOJ) against MHFI and its S&P subsidiary remains outstanding and an over-hang on the company's credit profile. Fitch believes MHFI 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 September 2014, unadjusted gross leverage was 0.4 times (x) and total gross debt stood at approximately $800 million ($400 million due in 2017 and $400 million due in 2037).
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 providing the company significant financial flexibility at the current rating level. Fitch makes no assumption regarding the timing, course of litigation or potential for settlement.
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 47% 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 expects MFHI to continue deploying FCF towards acquisitions and share repurchases. However, continued share repurchases during a period of heightened risk of a material legal or regulatory payment could pressure the ratings. Fitch believes that the company does not intend to materially increase leverage for shareholder friendly actions.
The company's liquidity position and financial flexibility remains strong given the strength of its businesses and expected free cash flow generation. Liquidity is supported by cash and cash equivalents totaling $1.9 billion (approximately $959 million held in the U.S.) and full availability under its $1 billion commercial paper (CP) program (backed by MHFI's $1 billion bank credit facility due June 2017) as of Sept. 30, 2014. The company has ample cushion inside of the credit facilities' 3.25x indebtedness-to-cash flow ratio.
The company generated approximately $916 million of FCF, before regular dividends during the LTM period ended September 2014 ($595 million after $321 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.
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.
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 affirms the following ratings for MHFI and assigns a Stable Rating Outlook:
--IDR at 'BBB+';
--Short-term IDR at 'F2';
--Senior unsecured at 'BBB+';
--Commercial paper at '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