NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed McGraw Hill Financial Inc.'s (MHFI) Long-term Issuer Default Rating (IDR) at 'BBB+'. In addition, Fitch has affirmed the individual issue ratings at 'BBB+' and short-term ratings at 'F2'. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
Diversification: Fitch Ratings recognizes MHFI's diversification, with more than half of revenues and EBITDA coming from outside the ratings business. The diversification and strength of those other businesses provide MHFI with the flexibility to absorb negative performance or changes in the S&P Ratings business.
Business Realignment: In September 2015, MHFI completed the acquisition of SNL Financial (SNL) for approximately $2.225 billion. The purchase was funded with a mix of incremental debt and cash on hand. SNL's ultimate cost will be partially offset by acquisition-related tax benefits having an estimated present value of approximately $550 million. Fitch views the SNL transaction favorably from a strategic standpoint as it will strengthen MHFI's operating profile, diversify its revenue sources and provide compelling growth opportunities given minimal product line overlap.
In October 2015, MHFI announced it was exploring strategic alternatives for J.D. Power. MHFI did not disclose terms of any potential transactions. Fitch notes that J.D. Power comprised approximately 6% of fiscal year 2014 total sales. Fitch expects any sale proceeds will be used for general corporate purposes.
Financial Flexibility: The company's liquidity position and financial flexibility remain strong after the acquisition given the strength of its businesses and expected FCF generation. Fitch believes MHFI has significant financial flexibility following the resolution of legal and regulatory matters relating to certain U.S. residential mortgage-backed securities and U.S. collateralized debt obligations. MHFI recorded $1.6 billion in charges that have largely been paid. As of Sept. 2015, pro forma for a J.D. Power disposition and a full year of SNL's EBITDA, Fitch estimates MHFI had total leverage of approximately 1.6x and total debt of $3.5 billion (nearest maturity is $400 million due in 2017).
Leverage Capacity Scenarios: Under various scenarios Fitch has modeled, which include assumptions for acquisitions and capex, Fitch believes gross leverage could temporarily exceed its rating tolerance of 2.5x and maintain current ratings. Based on current leverage and EBITDA levels, MHFI has approximately $2 billion in additional debt capacity at the 2.5x threshold. Although MHFI has stated they are targeting to maintain investment grade ratings and balance sheet flexibility post the SNL acquisition, they have not verbalized a total leverage target.
Capital Deployment: Fitch expects MHFI to continue to deploy free cash flow (FCF) towards acquisitions and shareholder returns in the form of dividends and share repurchases, and notes that the company's capital allocation strategy and capital structure policy will remain key rating considerations. Fitch expects FCF after dividends to range from $650 million to $800 million. Continued share repurchases during a period of heightened risk of a material legal or regulatory payment could pressure the ratings.
Fitch's key assumptions within the rating case for MHFI include:
--Low to Mid-single digit growth and modest margin expansion from cost reduction efforts, divestiture of non-profitable units and inherent operating leverage
--Fitch expects FCF (after dividends) to range from $650 to $800 million during the rating horizon
--Moving forward, Fitch assumes FCF is deployed towards acquisitions and share repurchases
Positive Rating Triggers: A ratings upgrade may occur if the company's business and operational profile remains in line with current performance. The cumulative effect of acquisitions and share repurchases on the credit profile continues to reflect a conservative balance sheet and financial policy, which may include sustained leverage under 1.5x.
Negative Rating Triggers: Ratings may be downgraded if leverage is driven beyond 2.5x and if Fitch believes that such elevated leverage will be maintained. Also, ratings would be pressured in the event of a material disruption, negative operating results or business model changes at the S&P Ratings business that materially affected margins and FCF.
Strong Liquidity: MHFI has historically maintained, and is expected to continue to maintain, strong liquidity given the strength of its business units and expected FCF generation. As of Sept. 2015 the company had $1.4 billion in cash ($144 million held in the U.S.) and full availability under its $1.2 billion CP program (backed by its $1.2 billion credit facility due June 2020).
Fitch affirms the following ratings:
McGraw Hill Financial Inc.
--Issuer Default Rating (IDR) at 'BBB+';
--Senior Unsecured at 'BBB+';
--Short-Term IDR at 'F2';
--Commercial Paper at 'F2'.
Date of Relevant Rating Committee: Jan. 29, 2016.
Additional information is available at 'www.fitchratings.com'.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Dodd-Frank Rating Information Disclosure Form