Houghton Mifflin Harcourt: Downgraded By Moody’s

Moody’s has downgraded education publishers Houghton Mifflin Harcourt Publishers (“Houghton” or “HMH”) to Caa1 from B3. Here’s an extract from the press release on the subject:

“The downgrades reflects Moody’s expectation of a sharp decline in revenue in 2020 caused by budgetary constraints and likely deferrals of purchasing decisions by school districts amid the coronavirus pandemic, which will lead to HMH’s earnings decline and a spike in leverage in the next 12-18 months,” according to Dilara Sukhov, Moody’s lead analyst on Houghton Mifflin. “Meaningful rebound in the company’s performance in 2021 is unlikely given the potential educational funding pressures at state and local level, making it difficult for HMH to achieve earnings growth that is necessary to reduce its very high leverage and generate positive free cash flow”

BDC exposure is modest ($8.9mn) – all in first lien debt) and limited to Oaktree Specialty Lending (OCSL) and non-traded Guggenheim Credit. We are downgrading the company – given that the current rating is in the speculative spectrum and industry conditions are clearly difficult – to CCR 4 from CCR 2. Nonetheless, Moody’s suggests the company is in no immediate danger of liquidity crisis or default so we’ll leave Harcourt off the Weakest Links list.