We've Awarded Reed Elsevier a BBB Credit Rating

Our credit rating reflects Reed Elsevier's combination of narrow economic moat with high leverage and poor Cash Flow Cushion

Morningstar Credit Committee 20 December, 2010 | 9:15AM
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Morningstar is initiating credit coverage of Reed Elsevier (REL) with an issuer rating of BBB, which reflects the firm's narrow economic moat but high leverage and poor Cash Flow Cushion. Reed Elsevier is a diversified publisher and information provider. Its Elsevier journal business and LexisNexis segment contribute almost all of the company's operating profit. In 2008, the company acquired ChoicePoint (folded into LexisNexis), whose main enterprise provides data and analytics software to property and casualty insurers. Earnings in Reed Business, which owns a portfolio of business information publications and data service providers, have been soft; the firm tried to sell the business in 2009, but was unable to because of the frozen credit markets. We expect it to try again within the next few years.

Reed Elsevier took on £1.5 billion of debt in 2008 in connection with its acquisition of ChoicePoint, which greatly increased leverage a turn and a half to nearly 4 times (pro forma). Since then, the firm has repaid nearly £1 billion in debt primarily through a £800 million equity issuance. Debt/capital and total debt/EBITDA have averaged 0.79 and 3.3, respectively, over the past three years, and we expect total leverage to gradually decline over the next five years. Management's target net debt/EBITDA is 2-3 times, and we estimate this level will be 3.2 times at year-end 2010. Despite the large amount of debt, the maturities are spread out, with half of outstanding debt due over the next five years. Despite a Cash Flow Cushion of less than 1 times our base-case expense and obligation forecast, we think the company can comfortably cover its debt obligations with ample access to liquidity in the form of an undrawn £2 billion credit facility, in addition to £700 million in cash.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
RELX PLC3,622.00 GBX1.74Rating
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