S&P rates McGraw-Hill loan B+

S&P said it affirmed McGraw-Hill Education Inc.'s B issuer credit rating and assigned a preliminary B+ rating and preliminary 2 recovery rating to the company's proposed $3.7 billion first-lien credit facility due 2024.

The preliminary 2 recovery rating indicates 70%to 90% expected default recovery.

McGraw-Hill announced it is merging with Cengage Learning Holdings II Inc. in an all-stock transaction, S&P explained.

The agency said it expects debt leverage for the combined company to be about 7x at the end of fiscal 2020, improving to about 6.5x by fiscal 2021.

As part of the proposed merger, McGraw-Hill is seeking to refinance its own and Cengage's existing term loans, along with McGraw-Hill's $350 million revolving credit facility into the new $3.7 billion credit facility.

The stable outlook reflects an expectation that operating performance at stand-alone McGraw-Hill MHE will remain stable before the closing with 3% revenue growth and free operating cash flow-to-debt of about 7%.

The new company will be called McGraw Hill and will have greater scale and improve profit margins and cash flow generation given management's expectations for about $300 million in cost savings, S&P said.

The company is exposed to declining enrollment and competition from used and rental textbooks in its higher education segment and volatile state and local budgetary spending in its K-12 segment, the agency said.

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