TEXT-S&P revises Merrill Corp creditwatch to developing from positive

Fri Nov 30, 2012 5:13pm EST

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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.
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