Moody's takes negative view of Houghton's cost-cutting

BOOK PUBLISHER Houghton Mifflin Harcourt (HMH), part of Barry O’Callaghan’s heavily-indebted Education Media Publishing Group, had two financial ratings downgraded over a potential “fundamental” restructuring of its debts.

Credit rating agency Moody’s lowered the company’s probability-of-default rating and “corporate family” ratings, and placed them on negative outlook, meaning that the firm could be downgraded again.

The action will increase the company’s borrowing costs.

Moody’s said the downgrade reflected its “concerns that the company may determine that a fundamental debt restructuring represents the best alternative to addressing its currently challenged capital structure”.

The agency said the lowering of the corporate-family rating to “Caa3” reflected its view that “management’s cost-cutting initiatives may be insufficient to offset the impact of declining top line”.

“A more comprehensive balance sheet overhaul may be required to address HMH’s unsustainable capital structure”.

Education Media Publishing Group was created from the reverse takeover of Boston educational and literary publisher Houghton Mifflin by Mr O’Callaghan’s Irish-based education software firm Riverdeep.

The enlarged company later acquired Harcourt, the consumer publishing unit of Reed Elsevier.

Mr O’Callaghan last month cancelled the sale of HMH, the consumer books division of his overall group, after considering three tentative offers. The sale was cancelled as the group’s lenders agreed to relax covenants on $6.7 billion (€5.3 billion) of debt.

The ratings downgrade is now likely to increase the pressure on the borrowing costs and debt arrangements of the company.

Mr O’Callaghan, who is chairman of the overall publishing group, will take over as chief executive of HMH later this month.

Based in Boston, Massachusetts, HMH is one of the largest educational publishers in the US with revenues of about $2.1 billion.

Moody’s said the lower ratings reflect the company’s high level of debt and vulnerability to declining sales on educational publications.

The agency said that HMH was exposed to further contraction or deferral of state educational budgets, and strong competition from large publishing rivals such as Pearson and McGraw Hill.

However, Moody’s said HMH was supported by the long-established reputation of its books, a strong market position and capital-intensive barriers for competitors.

Mr O’Callaghan told staff last month that the publishing group had modified its loan terms. He had asked for the requirement that the debts of Education Media Publishing Group at March 31st be no more than 8.75 times its earnings before interest, tax, depreciation and amortisation (Ebitda) to be loosened to 9.95 times.

He also requested that the company be allowed up to 7.45 times debt leverage by the end of March 2010, instead of 6.5 times. He said the group “did not anticipate” covenant issues this year.