TEXT-S&P puts Cenveo's 'B' rating on watch negative
Overview -- Top-line revenue performance continued to be weak during the first half of 2012 and the company has $98.5 million of 2013 maturities outstanding. -- We are putting all ratings on Stamford, Conn.- based diversified printing company Cenveo Inc., including our 'B' corporate credit rating, on CreditWatch with negative implications. -- The CreditWatch placement reflects our expectation that the 2013 maturities still outstanding at year-end 2012 will pose a significant risk. Rating Action On Oct. 2, 2012, Standard & Poor's Ratings Services placed all ratings for Cenveo Inc., including the 'B' corporate credit rating, on CreditWatch with negative implications. Rationale The CreditWatch placement reflects Standard & Poor's expectation that the company may not have enough liquidity to pay down its 7.875% senior unsecured notes by mid-2013. If the notes are not fully repaid by June 1, 2013, the maturity date of the revolving credit facility and term loan will be accelerated to Sept. 2, 2013. As of the company's second quarter earnings call on Aug. 9, 2012, $98.5 million of the 7.875% senior unsecured notes remained outstanding. Over the next year, we expect the company's leverage to remain high and liquidity to remain limited, with significant debt maturities in 2013. For these reasons, we consider Cenveo's financial profile "highly leveraged" (based on our criteria). We view the company's business risk profile as "weak" because of Cenveo's participation in the highly competitive and cyclical printing markets. We expect ongoing pricing pressure from industry overcapacity and limited scope for margin improvement. Over the near term, we expect this to result in lower organic revenue and make any EBITDA gains unlikely without cost reduction. A midsized company, Cenveo has a leading niche position in fragmented segments of the printing market, including direct-mail envelope manufacturing, specialty-label manufacturing, packaging printing, and technical journal printing. Despite this, our assessment of Cenveo's business profile as weak reflects our expectation of a continuing migration online of certain forms of printed media--such as journals and periodicals--and intense pricing pressure. Cenveo has been relatively effective at cost management and realizing acquisition synergies, but, in our view, faces ongoing revenue pressures. For the full year of 2012, we believe revenue will fall at a mid- to high-single-digit percent rate. We believe that EBITDA will be flat to slightly up because of cost reductions and lower restructuring expenses. In 2013, we believe organic revenue will remain flat or decline at a low-single-digit rate. We expect EBITDA to fall at a low-single-digit rate as well. During the second quarter, top-line revenue performance was below our expectations, as revenue fell 6.6% because of lower direct mail volume and pricing pressure. EBITDA growth of 1.9%, above our expectations, was a result of lower sales, general, and administrative expenses. Leverage, adjusted for leases, pension, and accrued interest was high, at 7.1x for the 12 months ended June 30, 2012, consistent with the indicative debt to EBITDA ratio of above 5.0x that we associate with a highly leveraged financial risk profile. Coverage was low at 1.7x. We expect leverage to improve minimally because of modest EBITDA gains and some debt repayment, but remain high. We believe interest coverage will remain below 2x over the near term. The company converted about 38% of EBITDA to discretionary cash flow for the 12 months ended June 30, 2012. We expect the company to convert roughly 25% to 40% of EBITDA to discretionary cash flow in 2012 and 2013, but believe that discretionary cash flow will be insufficient to pay down the 7.785% senior unsecured notes by June of 2013. We expect Cenveo to primarily use discretionary cash flow for debt repayment. Liquidity Cenveo has "less than adequate" sources of liquidity, per our criteria. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions: -- We believe the company's sources of liquidity may not exceed uses by 1.2x or more over the next 12 to 18 months. -- We believe that the company will not maintain covenant compliance if EBITDA decreases by 15%. On June 30, 2012, Cenveo had $14 million in cash. Availability under its revolving credit facility was $48 million as of July 31, 2012. We expect the company to report positive discretionary cash flow of roughly $40 million to $70 million in 2012. The company's margin of compliance with financial covenants was tight at slightly under 10% as of June 30, 2012, causing gross revolver availability to decline. The covenants have periodic step-downs, the next being from 6.25x to 6x at the end of 2012, and we expect headroom to remain tight over the -foreseeable future. The next significant maturity is in December 2013, when the $98.5 million outstanding of the company's 7.875% senior subordinated notes are due. The term loan has 1% amortization. Recovery analysis For the latest recovery analysis, see our recovery report on Cenveo, published on Jul. 11, 2012, on RatingsDirect. CreditWatch In resolving our CreditWatch, we will assess the company's ability to address its 2013 maturities. We could lower the rating if we conclude that the company will not have adequate liquidity to pay down its 7.875% subordinated notes by June 1, 2013, as the maturity date of the revolving credit facility and term loan will be accelerated to Sept. 2, 2013, if the notes are not paid down at this time. We could also lower the rating if covenant headroom continues to tighten to less than 5% and it appears that the company may violate covenants. Although a remote possibility, we could revise the outlook to stable, should Cenveo reduce its 2013 debt maturities meaningfully by the end of 2012, and we become confident that the company will generate enough cash flow and have enough revolving credit facility capacity to meet this obligation, while establishing a margin of compliance healthily above 10%. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Affirmed; CreditWatch Action To From Cenveo Inc. Corporate Credit Rating B/Watch Neg/-- B/Negative/-- Cenveo Corp. Senior Secured BB-/Watch Neg BB- Recovery Rating 1 1 Senior Secured Second Lien B-/Watch Neg B- Recovery Rating 5 5 Senior Unsecured CCC+/Watch Neg CCC+ Recovery Rating 6 6 Subordinated CCC+/Watch Neg CCC+ Recovery Rating 6 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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