Concerns have been raised over the $7.6bn of debts held by Education Media & Publishing Group (EMPG), which owns education publisher Riverdeep, after it emerged it has an exposure to Lehman Brothers and to severe cutbacks in education funding by cash-strapped municipalities in the US.

The company, led by billionaire Barry O'Callaghan, has had its credit rating outlook lowered to negative by Standard & Poor's which says the company's ability to avoid breaching bank covenants is in danger of becoming "thinner''.

O'Callaghan, who was reported to be worth €1.4bn earlier this year, has a stake of about 47% in EMPG. "We are concerned about the company's exposure to Lehman Brothers Inc, which provided a portion of the company's revolving credit agreement,'' the agency said. It said "liquidity'' was now the key issue for the rating on EMPG, which owns another education publisher, Houghton Mifflin Harcourt.

Last month the Minister for Enterprise, Trade and Employment Mary Coughlan announced that Houghton Mifflin Harcourt was to invest €350m in a research and development operation in Dublin, leading to the creation of 450 jobs.

While acknowledging the company's businesses have "good market positions'' in key disciplines, concern is expressed about its "steep leverage'' which consists of consolidated debt and preferred shares. The company's lower rating, B-/negative, stems from it having "heightened financial risk" after acquiring the Harcourt publishing business in December 2007 for $4bn.

"The purchase doubled the size of EMPG, and the combined company is the largest K-12 education publisher in the US," the agency says.

However it warns this market could be set to seriously suffer if state and local budget pressures continue in the US. The risk is that the discretionary cashflow EMPG is producing will remain negligible for full-year 2008.

It says cost savings will be needed when it integrates the acquired businesses so that it does not breach its banking covenants.