Ratings agency Moody’s has placed the long-term Baa1 rating of London-based educational giant Pearson Plc (LON:PSON) on review for downgrade, the agency announced last week, following Pearson’s January update.
Moody’s highlighted Pearson’s own expectations that operating profit in 2016 will drop 14-19 percent to £580-620 million, before a significant restructuring charge of £320 million.
The agency flagged potential delays in Pearson’s expected improvement in profitability for 2017-2018 over “execution risks” with the firm’s restructuring plan and potential business growth slowdown.
The ratings agency said it will examine a range of issues in its assessment, including execution risks with Pearson’s restructuring programme; the viability of the company's 2016-18 business plan; the scope for potential stabilization in Pearson's key education markets over the next couple of years; and the evolution of Pearson's net debt and key credit metrics in 2016 and beyond.
"Our decision to review Pearson's Baa1 ratings for downgrade reflects the prolonged weakness in its operating performance as a result of challenging conditions in several of its key education markets." says Gunjan Dixit, a Moody's Vice President and lead analyst for Pearson.
"Pearson has generated significant proceeds from asset sales, which have helped to support the company's credit profile. Yet with ongoing weak operating performance, Pearson will likely rely on a portion of these disposal proceeds to fund the restructuring and the dividends, which could increase the company's net debt position in 2016."
The review is expected to be completed in the near term and any downgrade of Pearson's ratings is not expected to be more than one notch, Moody’s said.
The Baa1 is the third-lowest long-term investment grade rating in Moody’s scale.
Fellow ratings agency Standard & Poor’s has Pearson on its lowest investment grade notch, BBB. S&P reduced its outlook on the publisher from “stable” to “negative” in October.
Pearson’s share price had edged 0.13 percent higher to 758.50p as of 13:50 GMT today, outperforming the FTSE 100 which was down some 0.5 percent. So far in 2016, Pearson’s stock has appreciated over three percent, as compared with a six-percent drop for the FTSE.