The 'B+' Issuer Default Ratings (IDR) for Houghton Mifflin Harcourt Publishers Inc. (HMH) and its subsidiaries are unaffected by the company's announced plans to reprice its $246 million outstanding senior secured term loan due May 2018, according to Fitch Ratings. Fitch rates the senior secured term loan and ABL revolver at 'BB+/RR1'. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

The security package and guarantees are expected to remain unchanged, and covenants and restrictions are also expected to be materially unchanged. While the modest reduction in interest expense is favorable to the credit, the ratings remain unchanged. Fitch calculates post-plate unadjusted gross leverage of 1.1x as of Sept. 30, 2013. Fitch expects leverage to remain around 1x at year end.

KEY RATING DRIVERS

HMH continues to be a leader in the K-12 educational material and services sector. Fitch believes investments made into digital products and services will position HMH to take a meaningful share of the rebound in the K-12 educational market. Fitch expects HMH will be able to, at a minimum, maintain its market share. Fitch's base case model assumes revenue growth in 2014 in the low- to mid-single digits, driven by the increase in state wide adoptions (including Texas and California), supported by the adoption of common core standards.

HMH has significant financial flexibility to invest into digital content and new business initiatives. These investments into international markets and adjacent K-12 educational material markets may provide diversity away from highly cyclical state and local budgets.

The ratings reflect Fitch's belief that the current capital structure is not permanent, and that long-term, HMH would carry higher levels of leverage and debt on its balance sheet. Fitch does not expect any leveraging transactions in the near term.

LIQUIDITY

As of Sept. 30, 2013, liquidity was supported by $232 million in cash and $126 million in short-term investments. The company also has approximately $230 million in borrowing availability under the $250 million asset-backed revolver, due 2017. The term loan amortizes $2.5 million per year until its 2018 maturity.

Fitch calculates free cash flow (FCF) of $10 million for the LTM period ended Sept. 30, 2013. Fitch expects 2014 FCF to range from $25 million to $100 million, mostly driven by growth in revenue and EBITDA. Fitch expects HMH to continue to dedicate liquidity (including FCF) towards digital investments and adjacent K-12 educational material markets.

Given the strong recovery prospects, the $246 million senior secured term loan and the $250 million asset-backed credit facility is notched up to 'BB+/RR1'. This Recovery Rating analysis reflect a restructuring scenario (going-concern) and an adjusted, distressed enterprise valuation of $1.4 billion using a 6x multiple.

RATING SENSITIVITIES

--Revenue declines in the mid-single digits could result in rating pressures;

--Long-term, meaningful diversification into international markets and into new business initiatives could lead to positive rating actions.

Fitch currently rates HMH as follows:

HMH

--IDR 'B+';

--Senior secured term loan 'BB+/RR1';

--Senior secured asset backed revolver 'BB+/RR1'.

Houghton Mifflin Harcourt Publishing Company

--IDR 'B+'.

HMH Publishers LLC

--IDR 'B+'.

The Rating Outlook is Stable.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria & Related Research:

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage ' (Aug. 5, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

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