Fitch Initiates Ratings of Houghton Mifflin at 'BB-' Senior Secured, 'B' Senior Unsecured, and 'B-' Senior Subordinated.

Business Editors

NEW YORK--(BUSINESS WIRE)--Feb. 21, 2003

Fitch Ratings has initiated coverage on Houghton Mifflin Co. and assigned a 'BB-' rating to its existing senior secured debt and the new $325 million senior secured revolving credit facility expiring December 30, 2008. Simultaneously, Fitch Ratings assigned a 'B' rating to the existing senior unsecured debt and the new privately-placed $600 million 8.25% senior unsecured notes due 2011 and a 'B-' rating to the new privately-placed $400 million 9.875% senior subordinated notes due 2013. The Rating Outlook is Stable.

Proceeds from these new debt issuances refinanced debt used to fund the acquisition of Houghton Mifflin. In December 2002, three investment firms, Thomas H. Lee, Bain Capital, and The Blackstone Group, completed their acquisition of Houghton Mifflin for $1.3 billion in cash and $380 million in assumed debt. In conjunction with the acquisition, the investment firms contributed approximately $615 million of equity to the purchase price.

Fitch's ratings reflect the company's high debt balance relative to cash flow, modest cash flow coverage ratio, significant working capital requirements, as well as smaller size and overall weaker credit metrics compared to the other three major U.S. educational publishers. The ratings recognize Houghton Mifflin's prominent franchise in educational publishing benefiting from its well-developed, long-standing customer relationships and highly-regarded brand names. U.S. elementary-high school (el-hi) publishing represents the largest component of the company's business at approximately 55% of revenues and 65% of EBITDA adding back plate amortization. The company's other operating segments include college publishing, assessment services and trade and reference books.

While the company's basal programs are relatively more concentrated in key subject areas, Fitch considers Houghton Mifflin's leading 2002 adoption market shares in elementary Reading, English and Spelling as well as sixth grade to 12th grade Math and World Languages as positive rating factors. Demographic trends for these markets are generally favorable. While the funding environment at the state level is constrained by the prolonged economic slowdown, the el-hi industry should benefit from increased federal funding associated with the No Child Left Behind Act (NCLB).

Pro forma for the debt issuances, Fitch estimated total debt (including anticipated peak revolving borrowings associated with seasonal working capital needs) to EBITDA less plate amortization to be in the low-to-mid 6 times range at year-end 2002. On a total senior debt basis, the leverage ratio improved to the low 4 times range and on a senior secured basis to the low one times range. Pro forma EBITDA less plate amortization to interest coverage is estimated at approximately 2.0x. Due to sustained state budgetary constraints, continued softness built into the 2003 adoption schedule offset by increased funding under the NCLB Act, rising pension expense, and high investment in programs, Fitch does not anticipate significant improvement in leverage or coverage ratios over the near term.

The Stable Rating Outlook is supported by nominal debt amortization in the intermediate term and the relatively predictable nature of el-hi spending in the long-term.