US publisher Houghton Mifflin Harcourt (HMH), which is controlled by Irishman Barry O'Callaghan, has had its $6.4bn corporate family debt rating slashed by Moody's amid a belief that a fundamental debt restructuring is required at the company in order for it to survive.
The agency said the decision reflects its concerns that HMH "may determine that a fundamental restructuring represents the best alternative to addressing its currently challenged capital structure". Moody's added that its rating outlook for the company is negative.
Last month Mr O'Callaghan mothballed plans by his Education Media Publishing Group (EMPG) to sell HMH after receiving three indicative offers for the business. Lenders agreed to ease covenants related to $6.8bn of debt at EMPG as it tries to cope with the US recession.
Moody's explained yesterday that its previous Caa1 corporate family debt rating for HMH was based on its assessment that it would be possible for HMH to continue its operations as a going concern.
"However," it said, "the downgrade of the corporate family rating to Caa3 reflects our view that management's cost-cutting initiatives may be insufficient to offset the impact of declining top line [revenue], and that a more comprehensive balance sheet overhaul may be required to address HMH's unsustainable capital structure."
The move by Moody's will certainly be a significant blow to Mr O'Callaghan, a former Credit Suisse banker who transformed the Irish educational publishing group Riverdeep into a major sectoral player.
Mr O'Callaghan audaciously used Riverdeep to engineer a multibillion dollar reverse takeover of Houghton Mifflin, with the combined group later acquiring Harcourt for $4bn from Reed Elsevier.
The tactics created a publishing powerhouse; but one with a debt burden that threatens to undermine the group, according to ratings agencies.
Mr O'Callaghan (39) is chairman of EMPG and took over the chief executive role at the HMH last month. Mr O'Callaghan said recently that EMPG is likely to restructure its balance sheet within weeks in order to further ease its debt burden.
Moody's maintains that HMH remains vulnerable to state and local spending in the United States on so-called basal and supplemental K-12 (twelfth grade) educational publications. It says those categories posted a 22.8pc decline in sales in January 2009.
The agency also said that HMH faces stiff competition and further contraction or deferral of state budgets.