NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'BBB+' Issuer Default Rating (IDR) assigned to McGraw Hill Financial, Inc. (MHFI) with a Stable Outlook. A full list of ratings follows at the end of this release.
Fitch's action follows MHFI's announcement that it intends to acquire SNL Financial (SNL) for approximately $2.225 billion. The purchase will be funded with a mix of cash on hand ($525 million) and incremental debt ($1.7 billion, with a $1 billion bridge already committed) and is expected to close during the third quarter of 2015 subject to receipt of certain regulatory approvals. The impact on MHFI will be partially offset by acquisition-related tax benefits having an estimated present value of approximately $550 million.
As a result of the acquisition, MHFI's total leverage will increase from 0.7x as of June 30, 2015 to 1.6x on a pro forma basis (accounting for the SNL acquisition). Although MHFI has stated they are targeting to maintain investment grade ratings and balance sheet flexibility post-acquisition, they have not verbalized a total leverage target.
Overall, Fitch views the transaction favorably from a strategic standpoint as it will strengthen MHFI's operating profile, further diversify its revenue sources and provide compelling growth opportunities given the minimal product line overlap. In addition, the leveraging nature of the transaction is within the range associated with the existing ratings, which have tolerance for leverage to reach 2.5x.
SNL, founded in 1987, provides news, financial data, and analysis on the banking, insurance, financial services, real estate, energy, media and communications and metals and mining sectors. The company has more than 5,000 customers across the spectrum of investment professionals, including asset managers, investment banks and corporate management teams. Headquartered in Charlottesville, VA, SNL has approximately 3,000 employees in 10 countries. MHFI stated they will be keeping SNL's existing management team.
KEY RATING DRIVERS
--MHFI continues to see consistent operating performance across a diverse set of business segments;
--The company maintains a strong liquidity position;
--Solid free cash flow (FCF) generation;
--Despite issuing debt to fund the SNL acquisition, the company retains flexibility under the existing 'BBB+' rating to absorb additional debt-financed acquisitions.
RATING SENSITIVITIES
--An upgrade would be considered if the company continues to reflect a conservative balance sheet and financial policy in light of acquisitions and share repurchases, which may include an explicit commitment to operate at a specific leverage metric of 1.5x or lower.
--Negative ratings pressure could result from a more aggressive financial policy with leverage exceeding Fitch's 2.5x threshold for the rating in the absence of a credible plan to reduce leverage to under 2.5x.
--Rating pressure could also result from an inability to adequately integrate the SNL acquisition in a timely manner.
LIQUIDITY AND DEBT STRUCTURE
The company's liquidity position and financial flexibility remain strong given the strength of its businesses and expected FCF generation. Liquidity is further supported by cash and cash equivalents as of June 30, 2015 totaling $1.2 billion (pro forma for the acquisition; almost all held outside of the U.S.) and full availability under its $1 billion commercial paper (CP) program (backed by MHFI's $1.2 billion bank credit facility due 2020). The company has ample cushion inside of the credit facilities' 3.25x indebtedness-to-cash flow ratio.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
--Issuer Default Rating at 'BBB+';
--Short-term IDR at 'F2';
--Senior unsecured at 'BBB+';
--Commercial paper at 'F2'.
Additional information is available on www.fitchratings.com
Applicable Criteria
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=988625
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988625
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
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