Fitch Affirms Houghton Mifflin Harcourt's IDR at 'B+'; Outlook Stable
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B+' Issuer Default Ratings (IDR) of Houghton Mifflin Harcourt Publishers Inc. (HMH) and its subsidiaries. Fitch has also affirmed the senior secured term loan at 'BB+/RR1'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
HMH continues to be a leader in the K-12 educational material and services sector, capturing 38% of its Association of American Publishers addressable market in 2013. Fitch believes investments made into digital products and services will position HMH to take a meaningful share of the rebound in the K-12 educational market. Fitch expects HMH will be able to, at a minimum, maintain its market share. Fitch's base case model assumes revenue growth in 2014 in the mid to high-single digits, driven by new adoptions, including Texas, California and Florida.
HMH has significant financial flexibility to invest into digital content and new business initiatives. These investments into international markets and adjacent K-12 educational material markets may provide diversity away from highly cyclical state and local budgets.
The ratings reflect Fitch's belief that the current capital structure is not permanent, and that long term, HMH would carry higher levels of leverage and debt on its balance sheet. Fitch does not expect any leveraging transactions in the near term.
Leverage and Liquidity
Fitch calculates post-plate unadjusted gross leverage of 1.5x and post-plate adjusted gross leverage of 1.8x as of March 31, 2014. Fitch expects unadjusted leverage to decline to around 1.25x and adjusted leverage to decline to the 1.5x at year end.
As of March 31, 2014, liquidity was supported by $168 million in cash and $101 million in short-term investments. The company also has $146 million in borrowing availability under the $250 million asset-backed revolver, due 2017. The term loans amortize $2.5 million per year until their 2018 maturity.
Fitch calculates free cash flow (FCF) of negative $29 million in 2013. Fitch's base case projections expect FCF to turn positive in 2014 and range from $25 million to $50 million. 2013's FCF was impacted by costs associated with HMH's 2013 Initial Public Offering, and an unfavorable accounts receivable swing due to timing issues. Fitch's FCF projections do not expect a material working capital drain. Fitch expects HMH to continue to deploy cash (organically and through acquisitions) towards digital investments and adjacent K-12 educational material markets.
This Recovery Rating analysis reflects a restructuring scenario (going-concern) and an adjusted, distressed enterprise valuation of $1.4 billion using a 6x multiple. Given the strong recovery prospects, the $250 million senior secured term loan and the $250 million asset-backed credit facility was notched up to 'BB+/RR1'.
Negative Rating Actions: Revenue declines in the mid-to-high-single digits and/or consistent negative FCF generation (which would be contrary to Fitch's expectations) could result in rating pressures;
Positive Rating Actions: Long-term, meaningful diversification into international markets and into new business initiatives could lead to positive rating actions. Also, positive rating actions may be considered if a clear financial policy that is commensurate with a higher rating is communicated, which could include a leverage target and/or strategy around shareholder policy in terms of dividends and share buybacks. In addition, HMH demonstrating that it can consistently generate positive Fitch calculated FCF in excess of Fitch's expectations may drive positive rating momentum.
Fitch has affirmed the following ratings:
--IDR at 'B+';
--Senior secured term loan at 'BB+/RR1';
--Senior secured asset backed revolver at 'BB+/RR1'.
Houghton Mifflin Harcourt Publishing Company
--IDR at 'B+'.
HMH Publishers LLC
--IDR at 'B+'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria & Related Research:
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage