OREANDA-NEWS. Fitch Ratings has downgraded Reed Elsevier PLC's and Reed Elsevier NV's (together, Reed) Long-term Issuer Default Ratings (IDR) to 'BBB+' from 'A-'. The Outlook is Stable. A full list of rating actions is available below.

Reed's core business portfolio continues to perform strongly and in line with Fitch's expectations.

The downgrade in Reed's ratings is triggered by management's propensity to accept slightly higher leverage levels to fund stronger shareholder remuneration. Fitch expects Reed's funds from operations (FFO) adjusted net leverage to increase to 2.8x in 2015 and grow thereafter, remaining consistently above the 2.5x threshold for the 'A-' rating.

KEY RATING DRIVERS

During 2013 and 2014 Reed bought back GBP600m of shares per year accounting for approximately 50% of free cashflows (after dividends; before M&A). A further GBP500m programme has been scheduled for 2015. We expect Reed's FFO adjusted net leverage to increase to over 2.9x in the next two years from 2.5x at end-2014, as cash taxes increase and the company continues with its share buy-back strategy and M&A programme while maintaining dividend growth and capital expenditure levels. The higher leverage is above the threshold of 2.5x for an 'A-' rated company within the sector, making Reed's new rating of 'BBB+' more consistent with peers such as Thomson Reuters Corporation (BBB+/Stable).

Reed has a high quality, balanced portfolio of businesses that are competitively well positioned and geographically diversified. The company has effectively transitioned away from print and advertising (accounting for 18% and 2% of total revenues respectively) to businesses with predominantly subscription and recurring transactional revenue streams. Over 50% of group revenues are derived from subscription-based services, which generate healthy and visible cash flow streams.

A significant portion of Reed's information products are essential for the end-users they service and have become a key part of their workflow. This provides Reed with a tacit form of competitive advantage, making it difficult for competition to either enter or take market share. Reed continually reinforces its position by increasing the utility of its products through digitalisation, increasing data sets and analytical tools.

Reed has grown underlying revenues by 3% and underlying adjusted operating profit by 5%-6% per annum over the last four years. Fitch expects that Reed will continue to grow revenue at similar rates over the next three years. The main drivers of growth will be emerging markets and research productivity tools for the scientific, technical and medical division, growing demand for risk analytics in the insurance sector and increasing regulation and legislation in the broader commercial market, which supports Reed's products in the legal division.

Reed's ratings encompass two key business risk factors. Firstly, open access publishing, which creates an alternative platform to subscription-based pricing for journal publishing. Secondly, rapid developments in technology and new business models call for significant on-going investments. Fitch views that the associated risks are well managed by the company and that the changes in new business models and technology are also points of opportunity for the company.

- Revenues to grow by 2% to 3% per annum over the next three years with adjusted operating margins and free cashflow margins remaining broadly stable at 30% and 9% respectively

- Cash tax payments to progressively increase by approximately 35% over the next three years from GBP348m in 2014

- Reed to maintain its M&A programme within GBP350m per year

- Reed to continue its existing shareholder remuneration policy with dividends growing at approximately 3% per annum and a total of GBP1.3bn in share buybacks over a three year period

- No disruptive impact or change is assumed on the scientific, technical and medical journals unit from the evolution of open access subscription models

RATING SENSITIVITIES

- FFO adjusted net leverage exceeding 3.25x over a sustained period

- A marked deterioration in Reed's operating environment

- A more conservative stance towards financial leverage and shareholder remuneration

- Expectations that FFO adjusted net leverage would trend to below 2.5x on sustained basis

LIQUIDITY AND DEBT STRUCTURE

Reed has a strong liquidity position with cash and equivalents of GBP276m at FY14. An undrawn USD2bn credit facility, which has been extended to July 2019, is used to backstop GBP548m of commercial paper; short term loans (at FY14). Fitch expects Reed to remain free cash flow- positive under most downturn scenarios modelled by the agency.

FULL LIST OF RATING ACTIONS
Reed Elsevier PLC and Reed Elsevier NV:

Long-term IDR: downgraded to 'BBB+' from 'A-'; Outlook Stable

Short-term IDR: affirmed at 'F2'

Elsevier Finance SA

Senior unsecured notes: downgraded to 'BBB+' from 'A-'

Senior unsecured notes issued by Aquarius + Investments PLC: downgraded to 'BBB+' from 'A-'

Commercial Paper: affirmed at 'F2'

Reed Elsevier Capital Inc.

Senior unsecured notes: downgraded to 'BBB+' from 'A-'

Reed Elsevier Inc.

Senior unsecured notes: downgraded to 'BBB+' from 'A-'

Commercial Paper: affirmed at 'F2'

Reed Elsevier Properties SA

Commercial paper: affirmed at 'F2'

Reed Elsevier (Investments) plc.

Senior unsecured notes: downgraded to 'BBB+' from 'A-'

Commercial paper: affirmed at 'F2'