McGraw Hill Financial is a financial markets content and analytics company and parent to recognizable brands such as Standard & Poor’s Ratings Services, S&P Capital IQ, S&P Dow Jones Indices, Platts, and J.D. Power. If you are looking for a long-term investment opportunity with a respectable yield, McGraw’s Hills 2037 maturing notes may be of interest. But before sharing the details of those notes, I would like to present some more information of interest concerning McGraw Hill Financial’s business.
There are four segments to McGraw Hill Financial’s business: S&P Ratings, S&P Capital IQ, S&P Dow Jones Indices, and Commodities & Commercial. In the table below, you can find the percentage breakdown by segment of the company’s fiscal year 2012 $4.45 billion in revenue and $1.587 billion in adjusted operating profit. The 2012 figures exclude the education business, which was sold to Apollo Global Management. The deal was announced in November 2012 and closed in March 2013.
At this time, McGraw Hill Financial is projecting 2013 revenue growth in the “high single digits” and free cash flow of $650 to $700 million. In Q1 2013, revenues grew at a 14% year-over-year clip and adjusted operating profit was up 28% year-over-year. Q2 earnings are scheduled to be announced later in July. Moreover, the company has approximately $800 million of debt securities outstanding across just two CUSIPs maturing in 2017 and 2037. It is the 2037 maturing notes, CUSIP 580645AF6, that I would like to bring to investors’ attention.
Each of us has our own yield-to-credit-risk-to-duration profile at which bonds become attractive in our eyes. From my perspective, McGraw Hill Financial’s 6.55% coupon, November 15, 2037 maturing notes are currently at attractive enough levels to initiate a partial position. I typically like to buy anywhere from one-quarter to one-half of a full bond position at a time. While I would not object to putting on a full position if I found the yield-to-credit-risk-to-duration profile too attractive to pass up, I would be more inclined to buy all at once if I thought there was an imminent risk of yields going much lower. With long-term benchmark Treasury yields still in a strong uptrend, I am currently willing to take the chance and enter partial rather than full positions in individual bonds.
At Friday’s closing offer price of 98.601 (6.666% yield-to-worst), I think the McGraw Hill 2037 notes offer a compelling yield for the credit risk. I would therefore like to share additional details regarding the notes.
Additional Details for the 2037 Maturing Notes
The Prospectus Supplement, dated October 30, 2007, includes the following important information:
- The notes are unsecured and unsubordinated (senior) obligations.
- There is an “Optional Redemption” at the greater of 100 cents on the dollar or a make whole amount equal to the “sum of the present values of the remaining scheduled payments of principal and interest on the notes to be redeemed (not including any portion of such payments of interest accrued to the date of redemption) discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the applicable treasury rate plus . . . 30 basis points.”
- Conditional put for a change of control – If a “Change of Control Triggering Event” occurs, holders of the notes will be able to sell the notes to McGraw Hill Financial at 101 cents on the dollar. “Change of Control Triggering Event” means “the occurrence of both a Change of Control and a Below Investment Grade Rating Event. For additional details, see pages S-7 and S-8 of the Prospectus Supplement.
Furthermore, the Prospectus dated October 29, 2007 (same link as the Prospectus Supplement) details certain covenants on pages 10 and 11. This includes a limitation on liens and limitations on consolidation, merger, conveyance, or transfer.
It should also be noted that there is not as much liquidity associated with the 2037 notes as some investors might hope for. This is true both from a depth of market perspective and frequency of trading in the notes. When purchasing individual bonds, I find it worthwhile to do so under the assumption that the notes will be held to maturity. Given the liquidity dynamics just mentioned, that is particularly true with these notes.
Finally, I would be remiss if I didn’t mention the risk to McGraw Hill Financial from the Department of Justice (DOJ) and others filing civil lawsuits against the company, attempting to blame S&P for helping to cause the financial crisis of 2008 and 2009. S&P, which says the DOJ’s complaint “makes numerous allegations that are entirely without merit,” notes that its ratings were consistent with the views expressed in 2007 by both the Treasury and the Federal Reserve. If you would like to read a fact sheet S&P put together in response to the DOJ’s claims, click here. Regarding other lawsuits, 32 cases have been dismissed, 10 have been voluntarily withdrawn, and several dozen are still outstanding.
*Unless otherwise noted, the source for the non-bond-specific information in this article is McGraw Hill Financial’s presentation from the 2013 Barclays Americas Select Franchise Conference.
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