HM Riverdeep's credit rating may be downgraded

Moody's, the ratings agency, has said it may downgrade its credit ratings on $2.4 billion (€1.7 billion) of HM Riverdeep's debt following news of the firm's planned purchase of Reed Elsevier's US education arm.

The agency yesterday noted the planned $4 billion deal and said it would review the ratings it had placed on HM Riverdeep because of concerns about the company's debt burden.

The Reed Elsevier transaction is expected to leave HM Riverdeep with some $7.5 billion in debt.

The deal is to be funded by $3.7 billion in cash and $300 million in HM Riverdeep common stock.

Moody's suggested that the increased debt and higher costs that would be involved in deriving "synergies" from the purchase would delay a previously-expected decline in borrowings.

The agency's review will focus on the "pro-forma capital structure" at HM Riverdeep. It will also look at the likely time frame for the achievement of promised synergies and subsequent decline in debt.

HM Riverdeep expects to draw at least $100 million in annual cost savings from the latest deal.

This is in addition to the $70 million in annual savings it is hoping to achieve from the $4.95 billion Houghton Mifflin reverse takeover it completed eight months ago.

After the Reed Elsevier deal, HM Riverdeep is set to have an enterprise value of more than $10 billion. The company says it could record annual earnings before interest, tax, depreciation and amortisation of $1 billion if all goes to plan.

Pending the latest review, Moody's has a B3 rating on two sections of HM Riverdeep's debt and a B1 rating on a third.

In February, Moody's placed its ratings on about $1.9 billion of Riverdeep group debt on review following the resignation of the parent firm's auditors.

HM Riverdeep is in the process of moving its headquarters to the Cayman Islands to take advantage of a lighter system of regulation.

This will allow the firm greater freedom in making distributions to its investors, who include a number of private clients of Davy stockbrokers.