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TEXT-Fitch cuts Houghton Mifflin Harcourt IDR to 'CC'
April 5, 2012 / 8:27 PM / 6 years ago

TEXT-Fitch cuts Houghton Mifflin Harcourt IDR to 'CC'

April 5 - Fitch Ratings has downgraded the Issuer Default Rating (IDR) of
Houghton Mifflin Harcourt Publishers Inc (HMH) and its subsidiaries from 'CCC'
to 'CC'. There is no assigned Rating Outlook. A full rating list is shown below.
The downgrade impacts $3.1 billion in debt.	
	
The downgrade reflects Fitch's belief that HMH will look to reduce absolute
levels of debt and interest cost burdens through a balance sheet restructuring
(in or out of court). This heightened risk is driven by Fitch's analysis based
on the recent posting of the company's annual report. Fitch calculates adjusted
gross leverage and cash interest coverage at approximately 15 times (x) and
1.2x, respectively. Based on the current capital structure and Fitch's
expectations for 2012 and 2013, these metrics will continue to decline with
adjusted interest coverage falling below 1x. Fitch also notes that the company
has hired restructuring advisors and HMH has made comments regarding
strengthening their balance sheet.	
	
Fitch believes any restructuring transaction would impact both the bank and bond
holders. The bank debt and notes benefit from the same security package and
guarantees and are pari pasu with each other.	
	
Any out of court restructuring which imposed a material reduction in terms (less
principal, reduced coupon interest and/or tenor extension) and was necessary to
avoid a default or bankruptcy would be classified as a distressed debt exchange
(DDE). In the event of a DDE, Fitch would downgrade the IDR to Restricted
Default (RD). The IDR rating would subsequently be raised to a rating reflective
of the resulting capital structure.	
	
The top 7 equity holders own approximately 75% of the company and these equity
holders hold more than 51% of the credit agreement's outstanding balance. Fitch
recognizes that there is a remote possibility that the bank debt holders could
agree to amend and extend the revolver (2013) and term loan (2014) maturities,
preventing any equity dilution. However, Fitch believes a restructuring of the
balance sheet is more likely as a restructuring would reduce the interest
burden, improving liquidity and the company's financial flexibility to fund
capital and operating investments.	
	
HMH continues to be a leader in the K-12 educational material and services
sector, capturing 41% of 2011 market share (adoption and open territory market
[excluding Advanced Placement Sales] - based on Association of American
Publishers (AAP) and company data). 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's expects HMH will be able to, at
a minimum, defend its market share.	
	
Fitch expects revenues to continue to decline in the low to mid single digits in
2012. The education business is in a cyclical trough, and Fitch believes the HMH
and its peers will benefit from the adoption of common core standards in
2014/2015 which will fuel revenue growth.	
	
What Could Trigger a Rating Action	
--Ratings would be downgraded upon the announcement of a DDE or bankruptcy
filing.	
--A one notch upgrade to 'CCC' could occur if the bank maturities are extended.	
	
Recovery Ratings	
HMH Publishers' Recovery Ratings reflect Fitch's expectation that the enterprise
value of the company, and hence recovery rates for its creditors, will be
maximized in a restructuring scenario (going-concern) rather than liquidation.
Fitch estimates an adjusted, distressed enterprise valuation of $1.4 billion
using a 6x multiple. The 'RR4' Recovery Ratings for the secured debt issues
represent an expected recovery in the range of Fitch's 31% to 50% range.	
	
Liquidity and Leverage	
As of the end of December 2011, liquidity included $414 million in available
cash and $111 million in availability under the company's $250 million A/R
Facility, maturing in 2013/2014. Fitch believes that the company has sufficient
liquidity to fund operations, interest payments and amortization of the term
loan into 2014. Near-term maturities are HMH's secured termed revolver, $236
million due 2013, and secured term loans, $2.6 billion due in 2014. HMH's $300
million secured bonds mature in 2019.	
	
As of December 2011, Fitch calculates gross leverage and cash interest coverage
at approximately 15x and 1.2x, respectively (adjusting for deferred revenue,
other one time items and deducting for plate expenditures).	
	
Fitch has downgraded the following ratings:	
	
HMH Publishers	
--IDR 'CCC' to 'CC';	
--Secured first lien credit facility 'CCC'/RR4 to 'CC'/RR4;	
--Senior secured first lien notes 'CCC/RR4' to 'CC'/RR4.	
	
Houghton Mifflin Harcourt Publishing Company	
--IDR 'CCC' to 'CC'.	
	
HMH Publishers LLC	
--IDR 'CCC' to 'CC'.	
	
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable Criteria & Related Research:	
--'Corporate Rating Methodology' (Aug. 12, 2011).	
	
Applicable Criteria and Related Research:	
Corporate Rating Methodology

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