CHICAGO--(BUSINESS WIRE)--In Fitch Ratings' view, McGraw Hill Financial, Inc.'s (MHFI) 'BBB+' Issuer Default Rating is not affected by the company's announcement that its wholly owned subsidiaries, Standard & Poors Financial Services LLC and Standard and Poors Ratings Services, entered into settlement agreements with the U.S. Department of Justice (DOJ) and the Attorneys General of 19 states and the District of Columbia relating to certain U.S. residential mortgage-backed securities and U.S. collateralized debt obligations.
In accordance with the agreements MHFI agreed to pay $687.5 million to the DOJ and $687.5 million to the 10 states and the District of Columbia. Additionally the company entered into a settlement agreement with the California Public Employees' Retirement System (CalPERS) whereby the company agreed to pay $125 million to CalPERS to settle claims related to three structured investment vehicles. The settlements contain no findings of violations of law by the MHFI and its S&P subsidiary.
Fitch believes MHFI has significant financial flexibility to accommodate the cash requirements related to the settlement agreements while maintaining its current 'BBB+' IDR. Fitch expects MFHI to continue deploying free cash flow (FCF) towards acquisitions and share repurchases, and notes that the company's capital allocation strategy and capital structure policy will remain key rating considerations. Fitch currently believes that the company does not intend to materially increase leverage for shareholder-friendly actions.
As of September 2014, unadjusted gross leverage was 0.4x and total gross debt approximately $800 million ($400 million due in 2017 and $400 million due in 2037).
The company's liquidity position and financial flexibility remain strong given the strength of its businesses and expected FCF 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.
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 sustain current ratings, providing the company significant financial flexibility at the current rating level.
RATING SENSITIVITIES:
Ratings may be upgraded when:
--The company's business and operational profile remains in line with current performance without any material deterioration; and
--The cumulative effect of acquisitions and share repurchases on the credit profile post-judgments/settlements continue to reflect a conservative balance sheet and financial policy, which may include sustained leverage under 1.5x.
Negative rating actions could occur if there is:
--A shift to 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 currently rates MFHI as follows:
--IDR at 'BBB+';
--Short-term IDR at 'F2';
--Senior unsecured at 'BBB+';
--Commercial paper at 'F2'.
The Rating Outlook is Stable.
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
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
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