Fitch Downgrades S&P Parent McGraw-Hill IDR from 'A+' to 'A'; Ratings Watch Negative

Fitch Ratings has downgraded McGraw-Hill (NYSE: MHP) Issuer Default Rating to 'A' from 'A+'. In addition, Fitch has placed the ratings on Rating Watch Negative.

The Rating Watch Negative and ratings reflect the following:

The company is engaged in a strategic review of its portfolio and has publicly indicated its plan to announce significant actions in the second half of 2011. Fitch believes that leverage may increase as a result.

This concern has been compounded by the disclosure of JANA Partners approximately 5% voting control over the company. While the 5% voting control is not a material holding, Fitch believes that the slow recovering stock price of the company may compel other potential investors to support aggressive strategic actions that could be detrimental to bondholders.

Fitch is providing the following observations on various strategic options McGraw-Hill could pursue as part of its review.

Fitch estimates unadjusted gross leverage would be 1.0 times under a scenario where the company spun-out McGraw-Hill Education and the Information and Media operating segments, and the senior unsecured bonds remained with both the McGraw-Hill Financial and Standard & Poor's segments. Assuming an appropriate post transaction financial policy, this scenario could potentially support the current ratings.

While an unlikely scenario, Fitch estimates unadjusted gross leverage at approximately 1.5x if a spin-out of McGraw-Hill Financial, Education and the Information and Media operating segments occurred; leaving S&P to support the bonds. Assuming an appropriate post transaction financial policy, this scenario could lead to at least a potential one notch downgrade to the IDR.

Fitch believes that the guarantee provided by Standard and Poor's Financial Services LLC (which operates most of S&P's U.S. business) to the $1.2 billion senior unsecured bonds, link the bonds to S&P. Therefore, Fitch believes divesting or spinning out S&P without the $1.2 billion bonds would be challenging (requiring 100% bondholder consent) and unlikely. This is based on Fitch's interpretation of the indenture documents.

Given Fitch's belief that the bonds are tied to S&P and the size of S&P, 47% of EBITDA (and particularly S&P and MHP Financial combined, 67% of EBITDA), Fitch does not believe the disposition of substantially all of the assets clause found in the change of control definition would be triggered. Additionally if a change of control occurred it would still require a downgrade of the bonds into non-investment grade to trigger a change of control event. A change of control event would require an offer to buy back the bonds at 101%.

The Rating Watch Negative reflects the uncertainty of the potential changes to strategic/management/financial policy the company may ultimately make and the potential for further rating downgrades. Fitch believes that any actions announced by McGraw-Hill will be in the context of remaining an investment grade rated issuer.