Barry O'Callaghan's publishing empire was dealt another blow last week with the downgrading of subsidiary Houghton Mifflin Harcourt (HMH) by Moody's rating agency.

HMH, one of the biggest education publishers in the US, has been downgraded from a Caa1 to Caa3 by Moody's in the belief that much more radical measures are needed to address the company's "unsustainable" $6.4bn worth of debt. The move means HMH is just one grade above being considered highly liable to default.

"The downgrade reflects our view that management's cost-cutting initiatives may be insufficient to offset the impact of declining top line, and that a more comprehensive balance sheet overhaul may be required to address HMH's unsustainable capital structure," says Moody's.

HMH faces significant challenges in the US market where cuts in education spending saw an overall market decline of 22.8% in January. Rival publishing houses Pearson and McGraw Hill present strong competition.

HMH's parent company Education Media & Publishing Group (EMPG) was downgraded to a CCC rating by Standard & Poor in February. At the time O'Callaghan insisted that EMPG could "comfortably" cope with its $7.6bn debt. Much of the debt is not due to mature until 2015. EMPG placed HMH on the market in January but cancelled the sale last month.

No spokesman for the firm was available for comment.