TEXT-S&P revises American Greetings outlook to stable

Overview
-- U.S. greeting cards manufacturer and distributor American Greetings
Corp. has agreed to acquire U.K.-based retailer Clinton Cards PLC out of
Administration for approximately $37 million.
-- American Greetings' increased presence within the value store channel
in late fiscal 2012 has hurt the company's sales mix and margins.
-- We are affirming our ratings on the company, including the 'BB+'
corporate credit rating.
-- We are revising our outlook to stable from positive, reflecting our
belief that credit measures will weaken following the acquisition, in part
because of the reduced margins, and that excess cash flow might be limited as
the company pursues its information systems upgrades and world headquarters
projects.

Rating Action
On June 29, 2012, Standard & Poor's Ratings Services revised its outlook on
Cleveland, Ohio-based American Greetings Corp. to stable from positive. At the
same time, we affirmed all our ratings on the company, including the 'BB+'
corporate credit rating.

In addition, we affirmed the 'BBB' issue-level rating on the company's $400
million senior secured revolving credit facility due 2017. The recovery rating
remains '1', indicating our expectations of very high (90%-100%) recovery in
the event of a payment default. We also affirmed the 'BB+' issue-level rating
on the 7.375% senior unsecured notes due 2021. The recovery rating remains
'4', indicating our expectations of average (30%-50%) recovery in the event of
a payment default.

The outlook revision reflects out view that credit measures will weaken
following the acquisition of Clinton Cards PLC (Clinton), which will add
additional operating leases given the increased retail component, and as the
company continues to invest in information systems upgrades and a new world
headquarters. Furthermore, margins have declined because of American
Greetings' further penetration into the lower margin value channel.

About $330 million of total debt was outstanding on Feb. 29, 2012, at American
Greetings. We estimate the company will assume approximately $185 million of
additional operating lease obligations following the acquisition of Clinton.

Rationale
The ratings on American Greetings reflect the company's "intermediate"
financial risk profile and "fair" business risk profile. Key credit factors in
our business risk assessment include the company's good market position, yet
narrow product focus within the mature, low-growth, traditional greeting card
industry. This industry has struggled with the proliferation of e-cards as a
substitute for more traditional paper-based cards, and the increase in demand
for lower-margin "value" cards. We believe e-cards will continue to be an
alternative to traditional greeting cards.

American Greetings has a strong market position as the second-largest
manufacturer and distributor of greeting cards and other social expression
products in the United States, with market share similar to Hallmark Cards
Inc. (unrated). We believe the company's product focus is narrow (its core
greeting card business accounted for 75% of fiscal 2012 sales) and that the
greeting card industry has low growth and mature characteristics. We believe
the continued slow economic recovery and price-conscious consumers will likely
constrain sales growth over the next year. It is our opinion that sales and
EBITDA expansion will be largely dependent on the company's ability to drive
greeting card sales and increase operating efficiencies.

In the past few years, the company benefitted from refocusing on its core
wholesale greeting card business, divesting its retail operations and party
goods manufacturing business in 2009, and acquiring U.K. greeting card
designer and manufacturer Watermark Publishing Ltd. in March 2011. We believe
the company's recent acquisition of insolvent U.K. specialty retailer Clinton
Cards PLC in June 2012 for approximately $37 million represents a slight
change in this strategy; the company divested its retail businesses a few
years ago, and Clinton is all retail. However, Clinton was a long-standing
customer of American Greetings, and we view this acquisition as both
opportunistic and as a short- to medium-term investment.

The recent consumer shift towards lower-priced value cards has eroded margins
by about 100 basis points to about 13% as of the 12 months ended Feb. 29,
2012. As a result of the Clinton acquisition, we expect the company's adjusted
EBITDA margin for fiscal 2013 to erode further as additional capital
investment will be needed to restore Clinton to profitability.

Our intermediate financial risk assessment reflects our expectation that
despite some weakening of credit measures following the Clinton acquisition,
the company will maintain moderate financial policies and strong liquidity.
For the year ended Feb. 29, 2012, leverage was 1.5x and the ratio of funds
from operation (FFO) to total debt was 56%. We expect the company to assume
approximately $185 million of operating lease obligations related to
approximately 400 Clinton stores, in addition to its other assets. Pro forma
for the acquisition and taking into account these operating lease adjustments,
we expect leverage to increase significantly to about 3x, and for FFO-to-total
debt to decline to just below 30%. These measures are close to indicative
ratios for an intermediate financial risk profile, which include leverage
between 2x and 3x and FFO-to-debt of 30% to 45%. We believe credit measures
will remain near the pro forma levels through 2013 and into 2014.

Additional fiscal 2013 forecast assumptions include:
-- Revenues grow in the mid- to high-single digits, primarily thanks to
net incremental revenues from the Clinton acquisition.
-- EBITDA margins between 8% and 10%, because of expenses related to
refurbishing Clinton stores and sales shifts to lower-margin value card
channels.
-- Increases in working capital from the Clinton acquisition.
-- Minimal, or possibly negative, free operating cash flow after
accounting for the company's planned increase in capital expenditures and
working capital needs.
-- No additional significant share repurchases and acquisitions

Liquidity
We believe liquidity will be "strong" over the next 12-24 months, based on the
following information and assumptions:

-- We believe sources of cash are likely to exceed uses by at least 1.5x
for the next 24 months. Sources of cash include significant capacity under the
company's $400 million revolving credit facility due January 2017
(approximately $368 million in availability as of Feb. 29, 2012) and about
$100 million of FFO.
-- We estimate operating cash flow generation in excess of $100 million
in fiscal 2013, which we believe should be sufficient to cover planned capital
expenditures of $100 million.
-- We believe the company has sound relationships with banks and a
generally satisfactory standing in credit markets.

We expect net sources would remain positive even with a 30% drop in EBITDA
from the current level.

The company was in compliance with its financial covenants for the period
ended Feb. 29, 2012, and had EBITDA cushion of greater than 50% for both its
leverage and interest coverage covenants. We believe American Greetings would
be able to maintain compliance with its financial covenants even if EBITDA
were to decline by 30%.

Recovery analysis
For a complete recovery analysis, see Standard & Poor's recovery report on
American Greetings to be published following this report on RatingsDirect.

Outlook
The rating outlook is stable. We expect the company's credit measures to
weaken following the Clinton acquisition, and see the possibility of a weaker
sales mix from a slow economic recovery in the U.S. and further entry into the
value store channel in fiscal 2012. We expect American Greetings to sustain
leverage at or below 3x and for FFO-to-total debt to improve to over 30%
during the next two years.

We could lower the rating if the company adopts more aggressive financial
policies, including any material debt-financed share repurchases or
acquisitions; if cash flow does not improve; and/or if leverage were to
increase well over 3x, possibly from continued margin erosion and increased
debt levels. We currently estimate that EBITDA would only need to decline more
than 5% for this to occur, assuming fiscal year-end 2012 debt levels adjusted
for Clinton operating leases.

We could raise the rating if the company can stabilize its EBITDA margins and
reduce working capital levels while maintaining strong liquidity and a ratio
of FFO to total debt of greater than 40%.

Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Key Credit Factors: Criteria For Rating The Global Branded Nondurable
Consumer Products Industry, April 28, 2011
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings affirmed; Outlook revised
To From
American Greetings Corp.
Corporate credit rating BB+/Stable/-- BB+/Positive/--

Ratings affirmed; Recovery ratings unchanged
American Greetings Corp.
Senior secured BBB
Recovery rating 1
Senior unsecured BB+
Recovery rating 4