Overview -- U.S.-based document services company Merrill Corp.'s planned refinancing of its December 2012 and November 2013 debt maturities has taken longer to complete than we previously expected. -- We are revising our CreditWatch implications on the 'CCC-' corporate credit rating to developing from positive. -- The developing CreditWatch listing reflects our view that if the proposed transaction to refinance the company's December 2012 debt maturities is not completed by Dec. 22, 2012, the company would default on its first-lien term loan and revolving credit facility. Rating Action On Nov. 30, 2012, Standard & Poor's Ratings Services revised its CreditWatch implications on its 'CCC-' corporate credit rating on St. Paul, Minn.-based Merrill Corp. to developing from positive. Rationale The CreditWatch revision is based on the risks surrounding the imminent Dec. 22, 2012, maturity date of the existing first-lien term loan and revolving credit facility. Previously, the company announced plans to refinance its revolving credit facility due 2012, $374 million first-lien term loan due December 2012, and $219 second-lien notes due November 2013. At this time, the financing has not closed and the risks that a transaction will not be completed prior to maturity have increased. In concluding our CreditWatch review, if a financing closes, we will evaluate the final credit agreement terms and conditions compared to our initial expectations. We could raise the corporate credit rating to 'B-' if Merrill Corp. completes the proposed refinancing transaction at the expected pricing levels with covenant headroom of at least 20%. Given the delay in the transaction, we see a risk that these terms could be less favorable than we previously anticipated. If changes in terms and conditions result in free cash flow at only about breakeven, we would likely raise our corporate credit rating by two notches to 'CCC+'. If the company is unsuccessful in refinancing its debt, we would lower our rating to 'D'. We expect to resolve our CreditWatch listing in December, either upon closing of the refinancing transaction, or if the company defaults on its obligations. We view Merrill Corp.'s financial risk profile as "highly leveraged" because of its high debt leverage, near-term debt maturities, and a historically narrow cushion of covenant compliance. Merrill Corp.'s business risk profile, in our opinion, is "vulnerable" because of the high degree of volatility in operating performance given the company's reliance on the financial services industry, and intense competition in niche segments of the printing and document services industry. In fiscal-year 2013, we believe the company could continue to benefit from growth at DataSite and in the transaction and compliance services segment. Merrill will also benefit from the California election services business during the election year. Still, we expect negative secular trends in print volumes should persist for the foreseeable future, though it currently accounts for less than 15% of revenues. In the quarter ended July 31, 2012, operating performance was broadly in line with our expectations. Revenue increased 1.4%, while EBTIDA increased roughly 20% due to cost reductions, lower marketing costs, and success at the higher margin DataSite business. The EBITDA margin was roughly 12% over the last 12 months, which we expect could modestly improve over the next 12 months as the high margin DataSite business continues to grow. For the quarter ended July 31, 2012, pro forma for the proposed refinancing debt leverage was roughly 7x, compared with roughly 6.5x last year due to EBITDA declines as a result of tough economic conditions. For the same period, pro forma EBITDA coverage of interest was 1.4x, compared with 1.5x last year. We expect debt leverage will remain high over the intermediate term and believe the company would generate minimal discretionary cash flow given the high interest costs associated with the refinancing. CreditWatch In concluding our CreditWatch review, if a refinancing closes, we will evaluate the final credit agreement terms and conditions compared to our expectations. We could raise the rating to 'B-' if Merrill Corp. completes the proposed refinancing transaction at the expected pricing levels with a margin of covenant compliance of at least 20%. Any changes in the terms and conditions or pricing levels could result in our raising our corporate credit rating by only two notches to 'CCC+'. Conversely, if the company is unable to refinance the facility or extend debt maturities, we would likely lower the rating given the Dec. 22, 2012, debt maturities and short timeframe to attempt another transaction or obtain an extension. 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 Ratings List CreditWatch Action To From Merrill Corp. Corporate Credit Rating CCC-/Watch Dev/-- CCC-/Watch Pos/-- Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings referenced herein can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.