TEXT-S&P revises Visant Holding Corp outlook to negative

Fri Oct 5, 2012 2:06pm EDT

Overview
     -- We expect continued deterioration in operating trends to cause 
U.S.-based school memorabilia company Visant Holding Corp.'s credit metrics to 
weaken further over the near term.
     -- We are revising our 'B+' rating outlook to negative from stable.
     -- The negative outlook reflects our expectation that weak economic 
conditions and changing student purchasing habits will cause continued 
pressure on revenue and EBITDA over the near term, likely limiting future 
deleveraging.
 
Rating Action
On Oct. 5, 2012, Standard & Poor's Ratings Services revised its rating outlook 
on Armonk, N.Y.-based Visant Holding Corp. to negative from stable.

At the same time, we affirmed our 'B+' corporate credit rating on the company, 
along with all related issue-level ratings on the company's debt.

Rationale
The outlook revision to negative reflects our expectation that Visant's 
ongoing unfavorable revenue trends will continue to pressure EBITDA and 
discretionary cash flow, drive leverage higher, and could weaken its interest 
coverage. We continue to assess Visant's business risk profile as "fair," 
based on our criteria, given the good market position and solid operating 
EBITDA margin compared with its principal competitor. We view its financial 
risk profile as "highly leveraged" because of its high debt level and an 
aggressive financial policy, demonstrated by a large, special dividend in 2010.

Visant publishes school yearbooks and manufactures and sells school class 
rings, together known as "school affinity products." The school affinity 
product market is a mature business with relatively high barriers to entry. 
Visant has a strong competitive position in this niche business because of its 
existing relationships with customers and strong product offerings. These 
strengths, along with effective cost management, result in Visant having an 
EBITDA margin higher than its key competitor. Offsetting these strengths is 
the fact that a major portion of Visant's revenues and EBITDA are seasonal and 
highly dependent on the North American academic cycle. Because of the 
discretionary nature of purchases, Visant's operations are vulnerable to 
weakness in the economy and gold price spikes, which together have caused 
consumers to shift to lower-priced metals for jewelry and affinity products 
and have pressured revenues of late. 

Under our base-case scenario, we expect that for the remainder of 2012, 
revenue and EBITDA will decline at low- to mid-single-digit percentage rates, 
reflecting lower volumes resulting from continued weakness in consumer 
discretionary spending. This scenario incorporates the assumption that volumes 
will likely decline in the third quarter and that cost savings from plant 
consolidation of memory book facilities are likely to take longer than 
previously anticipated. In 2013, based on the current economic outlook, we 
have assumed current revenue flatness will likely persist. We expect the 
EBITDA margin to remain relatively flat or possibly decline modestly in 2013 
based on product development costs that are partially offset by the consumer 
shift to nontraditional low-cost rings. Longer term, we see moderate growth 
trends in class rings revenue and EBITDA subject to economic conditions 
improvement and gold price pressure easing. In yearbooks, we see a risk that 
digital substitution could pressure yearbook sales.

For the second quarter ended June 30, 2012, Visant reported a year-over-year 
6% decrease in revenues and 8% drop in operating income, slightly below our 
expectations. The performance reflected weak economic conditions, leading to 
lower graduation product sales and weak textbook sales. The EBITDA margin 
improved to 24.1%, compared with 23.1% in the prior-year period, and remains 
above its peers because of lower raw material costs. Over the past 12 months, 
Visant converted roughly 25.7% of EBITDA into discretionary cash flow, in line 
with our expectations; we expect discretionary cash flow to remain relatively 
flat until economic conditions improve.

Lease-adjusted debt to EBITDA was high, at 7x as of June 30, 2012, slightly 
higher than the same period last year and consistent with the 7x-and-higher 
leverage threshold that we associate with a highly leveraged financial risk 
profile. Higher leverage resulted from modestly lower EBITDA. Lease-adjusted 
EBITDA coverage of interest was 1.8x, in line with our expectations. We expect 
Visant's 2012 full-year debt leverage to remain in the low-7x area and 
interest coverage to remain in the high-1x area, based on our outlook for 
full-year EBITDA to be modestly lower. In 2013, we expect debt leverage to 
increase and interest coverage to weaken based on our base-case assumption of 
a modest EBITDA decline. 

Liquidity
We believe Visant has "adequate" sources of liquidity (based on our criteria) 
to more than cover its needs over the next 12 to 18 months, even in the event 
of moderate unforeseen EBITDA declines. Our assessment of Visant's liquidity 
profile incorporates the following expectations and assumptions:
     -- We expect sources of liquidity (including cash and facility 
availability) over the next 12 to 18 months to exceed uses by 1.2x or more. 
     -- We expect net sources would be positive, even with a 15% to 20% or 
larger drop in EBITDA over the next 12 months. Debt maturities over the next 
12 months are minimal.
     -- We believe Visant has the capacity to absorb high-impact, 
low-probability adversities.
     -- We believe the company has a satisfactory standing in the credit 
markets.
 
Liquidity sources include cash balances of $63.8 million as of June 30, 2012, 
our expectation of 2012 positive discretionary cash flow between $80 million 
and $100 million, and $163.1 million availability under Visant's $175 million 
revolving credit facility. Uses of liquidity include modest working capital 
requirements and capital expenditures, which we expect to be about $50 million 
over the next 12 months. We do not expect Visant to make additional dividend 
payments and meaningful acquisitions over the next 12 months.

Visant's earliest maturity is the 2015 maturity of the revolver ($175 
million), followed by the 2016 maturity of the term loan ($1.25 billion) and 
the 2017 maturity of the senior notes ($750 million). The company's credit 
facilities contain total leverage and interest coverage covenants. Visant had 
a 21% cushion against its total leverage covenant of 7.75x, on June 30, 2012, 
its tightest. We expect Visant to maintain adequate headroom against the 
covenants over the next 12 to 18 months, despite scheduled step-downs and a 
weak earnings outlook. 

Recovery analysis
For the complete recovery analysis, a report will be published as soon as 
possible after this report, on RatingsDirect. 

Outlook
Our rating outlook on Visant is negative, reflecting our view that credit 
metrics will continue to weaken over the near term. We could lower the rating 
if we become convinced that persistent EBITDA declines will lead to adjusted 
debt leverage above 7.25x on a sustained basis. We could also lower the rating 
if a structural demand shift becomes apparent that makes us less comfortable 
with the company's business prospects, and suggests further deterioration of 
credit measures.

We believe chances of an upgrade over the near term are remote, and would 
likely entail sustained lower leverage. An upgrade scenario would likely 
entail the company using excess cash largely for debt repayment. However, we 
believe management's aggressive financial policy could again lead to a 
leveraging transaction if business prospects improve. Therefore, without a 
firm commitment to establishing and maintaining leverage at or below 5.5x, we 
do not see a near-term upgrade scenario.

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012
     -- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
     -- Use Of CreditWatch And Outlooks, Sept. 14, 2009
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
     -- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
     -- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008


Ratings List
Ratings Affirmed; Outlook Revision
                                        To                 From
Visant Holding Corp.
 Corporate Credit Rating                B+/Negative/--     B+/Stable/--

Ratings Affirmed

Visant Holding Corp.
 Senior Unsecured                       B-                 
   Recovery Rating                      6

Jostens Canada Ltd.
 Senior Secured                         BB-                
   Recovery Rating                      2

Visant Corp
 Senior Secured                         BB-                
   Recovery Rating                      2 
 Senior Unsecured                       B-                 
   Recovery Rating                      6
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