UPDATE: S&P Lowers Outlook on Washington Post Co. ? And Here Come The Lawyers

By: Mark Fitzgerald

Standard & Poor’s Ratings Services Wednesday lowered its rating outlook on Washington Post Co. to negative from stable, citing concerns that proposed federal rules on student loans could hurt its biggest revenue producer, its Kaplan education business. S&P is however keeping its high  investment-grade  A long-term credit rating for the Post Co.

“While we acknowledge that the rules in this matter are not finalized, the negative outlook reflects the possible intermediate-term impact on some level of enrollment and cash flow in the company’s education division, which generated 50% of total EBITDA in the 12 months ended June 2010,” S&P credit analyst Hal Diamond wrote.

“Still, the rating reflects the company’s ample levels of excess liquidity, minimal financial risk, and strong and diverse business positions,” he added.

Meanwhile, a New Orleans law firm that specializes in stock fraud cases – and that has filed a lawsuit against another for-profit education company — announced it was investigating the Post Co. “to determine whether it has violated federal securities laws by issuing false and misleading statements to its shareholders.”

The firm, Kahn Swick & Foti LLC, has announced the filing of suits or similar “investigations” against for-profit school operators in the days after an Aug. 3 report by the federal GAO that alleged students at some of those schools were misled about job and salary opportunities available after graduation.

In its suit against Education Management Co., filed last week, the firm alleges among other things that the company “fradulently” enrolled students, giving a false image of the stock’s growth potential.

The price of Washington Post Co. shares (NYSE: WPO) fell by more than 40% after the company said the proposed rules might have an impact on its Kaplan Higher Education unit, but the stock has since made small daily gains. Just before the close of trading Wednesday, WPO was up $15.23, or 4.7%, to $340.98. It set a 52-week low of $295.56 on Monday, 46% below the high of $547.58 it established on April 21.

The Washington Post Co. — one of the few newspaper publishers that still has gold-plated credit ratings –could be downgraded because proposed federal rules that could cut its for-profit Kaplan schools out of the Title IV student loan program, Moody’s Investors Services warned Tuesday.

Moody’s said it had put the Post Co.’s A1 senior secured and Prime-1 commercial paper ratings on review for a possible downgrade.

Under Moody’s definitions, A1 is regarded as “upper-medium grade” investment grade bonds. Prime-1 is the highest credit rating for commercial paper, which is an unsecured obligation issued for short-term cash needs.
Washington Post Co. stock (NYSE: WPO) has already been hammered by Wall Street’s concerns about the effect the new rules could have on its Kaplan education unit, which accounts for about two-thirds of the company’s revenue.

Those worries intensified Monday when the Post Co. disclosed in a Securities and Exchange Commission filing that certain programs in its Kaplan Higher Education unit would not qualify for Title IV because too few of its graduates are paying down principal or too many have high debt loads.

Kaplan Higher Education accounts for about 18% of all the Post Co.’s revenue, according to the Post Co.’s SEC filing.

“The high degree of uncertainty regarding the ultimate outcome on Kaplan and WPO is the primary factor prompting the review of the Prime-1 rating,” Moody’s Senior Credit Officer John E. Puchalla wrote in a note to investors. “Kaplan’s higher education (KHE) division derives approximately 80% of its receipts from Title IV programs and Moody’s estimates KHE generated approximately 38% of WPO’s revenue and a higher percentage of EBITDA for the 12 months ended 6/30/10.”

A  Post Co. spokeswoman said the company had no comment on Moody’s announcement.

The Post Co. is in good financial shape, especially compared to its pure-play newspaper peers. It has a conservative balance sheet of about 1.5 times debt to EBITDA, by Moody’s estimates, and more cash ($659 million than “GAAP reported” debt ($403 million).

“Moody’s is concerned that pressure on Kaplan’s earnings could increase leverage over the intermediate term. In addition, as part of the review, Moody’s will
consider whether WPO will seek to more aggressively repurchase shares in response to the recent drop in its stock price,” Puchalla wrote.

With about an hour of trading left on Tuesday, WPO was priced at $327.80, up $12.15, or 3.9%, from the open. Monday, WPO was hammered down to a new 52-week low of $295.56, or 46% below the high of $547.58 it established on April 21.

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