Fitch: McGraw-Hill Financial Rating Unaffected by J.D. Power Sale Announcement
OREANDA-NEWS. McGraw Hill Financial, Inc.'s (MHFI) 'BBB+' Issuer Default Rating (IDR) is not affected by its $1.1 billion sale of J.D. Power, according to Fitch Ratings. MHFI did not disclose any additional terms of the transaction. Fitch notes that J.D. Power comprised approximately 6% of fiscal year 2015 total sales. The transaction is expected to close in the third quarter of 2016.
Fitch expects that sale proceeds will be used for general corporate purposes, potentially including acquisitions and share buybacks. Pro forma for the J.D. Power sale and the SNL Financial LLC (SNL) acquisition, Fitch estimates MHFI's total leverage was approximately 1.7x, well under Fitch's tolerance for the rating of 2.5x. 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. At Dec. 31, 2015, MHFI had total debt outstanding of $3.6 billion.
On Sept. 1, 2015, MHFI completed the acquisition of SNL for approximately $2.225 billion. The purchase was funded with a mix of cash on hand and incremental debt. 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.
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.
Ratings may be upgraded when:
--The company's business and operational profile remains in line with current performance without any material deterioration;
--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 actions could occur if there is:
--A shift to leverage over 2.5x without a creditable plan to reduce leverage over an appropriate amount of time;
--Material disruption, negative operating results or a business model change at the S&P Ratings business that materially impacted margins and FCF.
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 supported by cash and cash equivalents totalling $1.5 billion as of Dec. 31, 2015, with approximately $150 million held in the U.S. Fitch notes that the J.D. Powers' sale proceeds will bolster domestic cash balances. Liquidity is further supported by $1.1 billion of availability ($143 million outstanding) under its $1.2 billion commercial paper program (backed by MHFI's $1.2 billion bank credit facility due June 2020) as of Dec. 31, 2015. The company has ample cushion inside of the credit facilities' 4x indebtedness-to-cash flow ratio.
Under various scenarios Fitch has modelled, 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.
Fitch currently rates MFHI as follows:
--Issuer Default Rating (IDR) 'BBB+';
--Short-term IDR 'F2';
--Senior unsecured 'BBB+';
--Commercial paper 'F2'.