OREANDA-NEWS. Fitch Ratings has placed the 'B+' Issuer Default Ratings (IDR) assigned to McGraw-Hill Global Education Holdings, LLC (MHGE), McGraw-Hill Global Education Finance, Inc. (MHGE Finance), MHGE Parent, LLC (HoldCo) and MHGE Parent Finance, Inc. (HoldCo Finance) on Rating Watch Positive. Fitch has also assigned an Expected Rating of 'B-/RR6' to the proposed senior unsecured notes to be issued by MHGE and MHGE Finance. MHGE, MHGE Finance, HoldCo and HoldCo Finance are indirect wholly owned subsidiaries of McGraw-Hill Education, Inc. (MHE). A full list of rating actions follows at the end of this release.

Fitch's actions follow MHGE's announcement that it will be undertaking a recapitalization that will reduce debt, improve liquidity, diversify the company's operating and financial profile and strengthen the credit facilities' security package. The recapitalization is expected to be funded with a mix of cash on hand along with proceeds from the issuance of new senior secured and senior unsecured debt and MHE's previously announced IPO.

Fitch would consider an upgrade if IPO proceeds are used to repay all existing HoldCo debt, which should result in Fitch-calculated FFO adjusted total leverage declining below 4.5x. The recapitalization details include the expectation that MHE will use a portion of net proceeds from its IPO, announced in September, 2015, to repay the $500 million of senior unsecured notes issued by MHGE Parent, LLC (HoldCo) and MHGE Parent Finance, Inc. Pro forma for the IPO, FFO adjusted total leverage is expected to be 4.4x as of Dec. 31, 2015.

The Rating Watch Positive could be removed if the HoldCo notes are not repaid in an amount sufficient enough to reduce FFO adjusted total leverage below 4.5x. This could occur if MHE adjusts the expected uses of IPO proceeds or is unable to complete the IPO.

Fitch will begin calculating MHGE's leverage on a funds from operations (FFO) adjusted total leverage basis. This is driven by the contribution of McGraw-Hill School Education Holdings, LLC (MHSE) into MHGE as proposed with the refinancing and the resultant increase in MHGE's exposure to deferred digital revenues. The new calculation will be in line with how Fitch calculates leverage across the El-Hi industry, with the change in deferred revenue included in the calculation of FFO to account for GAAP-driven revenue timing differentials. As digital revenues continue increasing, revenues realized in a given year will eventually match revenues recognized in that year and EBITDA-based leverage will approach FFO-based leverage.

MHGE's proposed debt capital raise will be comprised of a $1.7 billion senior secured credit facility and $670 million of senior unsecured, eight year notes. The credit facility will be comprised of a $350 million five year revolver and a $1.3 billion six year term loan. MHGE expects to use these net proceeds, along with cash on hand, to repay existing debt at MHGE and MHSE, fund a $300 million dividend to shareholders, and fund prepayment penalties and fees associated with the transactions. Pro forma for the refinancing, FFO adjusted total leverage is expected to be 5.0x as of Dec. 31, 2015.

As part of the financing transactions, MHSE will become a wholly owned subsidiary (MHSE Sub) of MHGE and part of MHGE's credit group. Fitch views the contribution of MHSE Sub positively as it will diversify MHGE's operating and financial profile while strengthening the credit facilities' security position.

Fitch expects to withdraw several ratings upon the completion of certain events associated with the recapitalization. MHSE's IDR and issuer rating will be withdrawn once its credit facility has been repaid in full. The senior secured rating of MHGE and MHGE Finance will be withdrawn once their senior secured notes have been repaid in full. Finally, the IDRs and issuer ratings of HoldCo and MHGE Parent Finance, Inc. will be withdrawn once their senior unsecured notes have been repaid in full.

KEY RATING DRIVERS

Fitch views the recapitalization positively as it will strengthen MHGE's overall credit profile. The contribution of MHSE Sub will diversify MHGE's operating and financial profile while improving the credit facilities' security position. The new, larger revolver will improve MHGE's liquidity but is expected to reduce overall interest expense given market conditions. In addition, the credit facility will provide MHSE Sub with greater flexibility than its ABL facility. Finally, the repayment of the HoldCo notes with IPO proceeds will improve MHGE's leverage profile.

On a pro forma basis, MHGE calculates adjusted revenues of $2.1 billion and adjusted EBITDA of $486 million. The ratings reflect MHGE's new business profile, with 40% of consolidated adjusted revenues from higher education publishing/solutions, 39% from K-12 educations content, 15% from international, which includes sales of higher education and professional education materials, and 6% from professional education content and services. Fitch notes integration risks should be manageable given the similarities in the business operations.

Each segment of the U.S. education publishing market is dominated by three players. In the higher education segment, Fitch believes that Pearson, Cengage and MHGE make up approximately 75% market share. In the K-12 segment, Fitch believes that Pearson, Houghton Mifflin Harcourt and MHSE make up more than 80% market share. This scale provides meaningful advantages to these publishers and creates significant barriers to entry.

KEY ASSUMPTIONS

--Fitch's Base Case Assumptions are pro forma for the transactions and include the operating results of MHSE Sub:
Higher Ed revenue is forecasted to grow low to mid-single digits annually as digital continues its positive growth trajectory driven by growing acceptance of adaptive learning solutions. School is expected to return to positive growth in 2017 with new adoption opportunities. Professional and International revenue is expected to grow by 2% and 3%, respectively.

--EBITDA Margins are expected to grow driven by the continued implementation of cost savings that will more fully flow through the financial statements.

--Debt is repaid as required under amortization schedule, plus an additional $300 million of discretionary prepayments annually using excess cash flow.

--MHE's IPO proceeds are sufficient to repay $500 million of HoldCo notes.

--No dividends or share repurchases are contemplated following the IPO.

RATING SENSITIVITIES

Positive: The Rating Watch will be resolved positively when the company's planned IPO has been completed. Fitch will consider an upgrade if IPO proceeds are used to repay all existing HoldCo debt, which should result in Fitch-calculated FFO adjusted total leverage falling below 4.5x. Fitch may consider a multi notch upgrade if the company establishes a financial policy that results in a significant improvement in operating metrics, including FFO adjusted total leverage.

Negative: The Rating Watch Positive will be removed if the HoldCo notes are not repaid in an amount sufficient enough to reduce FFO adjusted total leverage below 4.5x. This could occur if MHE adjusts the expected uses of IPO proceeds or is unable to complete the IPO.

LIQUIDITY

Pro Forma for the announced transactions, as of Dec. 31, 2015, MHGE had $394 million in cash, an undrawn $350 million revolver due 2021. Fitch-calculated pro forma FFO adjusted total leverage was 5.0x

Fitch currently calculates MHGE's leverage using post-plate EBITDA, which was $337 million as of Dec. 31, 2015, resulting in pro forma gross leverage of 5.7x (pro forma for a $72.5 million term loan prepayment to be made in April 2016). Fitch post plate EBITDA does not add back certain adjustments made by the company, including deferred cash revenue and expected cost savings.

MHGE's Recovery Ratings reflect Fitch's expectation that the enterprise value of the company and, thus, recovery rates for its creditors, will be maximized in a restructuring scenario (as a going concern) rather than a liquidation. Fitch estimates a distressed enterprise valuation of $1.65 billion, using a 6x multiple and a post restructuring EBITDA of approximately $275 million. After deducting Fitch's standard 10% administrative claim, Fitch estimates recovery for the senior secured instruments consisting of new senior secured instruments of 90%, which maps to the high end of its 71-90% 'RR2' range. The HoldCo notes and new senior secured notes have no expected recovery, resulting in an 'RR6' rating. Issuance of additional secured debt could result in a one notch downgrade of the issue ratings.

FULL LIST OF RATING ACTIONS

Fitch has placed the following ratings on Rating Watch Positive:

McGraw-Hill Global Education Holdings, LLC (MHGE)
--Long-term IDR 'B+';
--Senior secured credit facility 'BB/RR2'.

McGraw-Hill Global Education Finance, Inc. (MHGE Finance; co-issuer on MHGE's senior secured credit facilities and notes)
--Long-term IDR 'B+';
--Senior secured credit facility 'BB/RR2'.

MHGE Parent, LLC
--Long-term IDR at 'B+';
--Senior unsecured notes 'B-/RR6'.

MHGE Parent Finance, Inc. (co-issuer to MHGE Parent's senior unsecured notes)
--Long-term IDR 'B+';
--Senior unsecured notes 'B-/RR6'.

MHGE
--Senior unsecured notes 'B-/RR6'.

MHGE Finance
--Senior unsecured notes 'B-/RR6'.

Fitch has affirmed the following ratings with a Stable Rating Outlook:

MHGE
--Senior secured notes at 'BB/RR2'.

MHGE Finance
--Senior secured notes at 'BB/RR2'.

McGraw-Hill School Education Holdings, LLC
--Long-term IDR at 'B';
--Senior secured credit facility at 'BB/RR1'.