Moody's rates Riverdeep loan, notes

Moody's Investors Service said it assigned a prospective B3 rating to Riverdeep Group Ltd.'s proposed €205 million in senior notes due 2011.

Concurrently, Moody's also assigned a prospective B2 senior implied rating to Riverdeep, a prospective B1 rating to the group's new $100 million in senior secured credit facilities due 2009, and a prospective Caa1 senior unsecured issuer rating at the top holding company level (Hertal Acquisitions plc, to be renamed Riverdeep Holdings plc).

The outlook is stable.

Moody's said the ratings reflect Riverdeep's highly acquisitive history and limited track record as an integrated entity, with high debt leverage and weak cash flow generation on an actual historical basis; a certain degree of volatility and lack of visibility in U.S. federal funding flows for K-12 instructional software, key to Riverdeep's growth strategy; a very competitive market coupled with high software complexity; challenges associated with the management and continued rationalization of three core product categories and five distribution channels; addressing specific market segments, material product and customer concentration to date; the company's very limited tangible asset base; and the current lack of independence in the company's board, which is still dominated by top management.

More positively, the ratings also factor Riverdeep's established and leading market positions in a small and fragmented industry; the company's strong and successful brand portfolio; strong fundamentals in the U.S. educational market; the company's recently improved cost structure and product rationalization, which should enable Riverdeep to yield substantial free cash flows going forward; management's financial commitment and track record in successfully integrating acquisitions and refocusing the business on growth areas; substantial barriers to entry within the industry; and Riverdeep's perceived attractiveness to a potential trade buyer, and past experience as a publicly-traded company, which should provide some valuation support in a downside scenario.

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