TEXT-S&P removes Cenveo ratings from watch, outlook is negative
Overview -- Cenveo Inc. announced that it received consents to its credit agreement to amend covenant levels and allow for the prepayment of up to $50 million of new unsecured loans. -- The company also announced that it raised a $15 million add-on to the secured term loan and that it has secured a commitment for a $50 million unsecured term loan due 2017. -- We believe these actions will address near-term liquidity risks. Accordingly, we are affirming the ratings and removing them from CreditWatch where they had been placed with negative implications on Oct. 2, 2012. -- The negative outlook reflects our expectation that revenue could continue to decline due to continued pricing and structural pressures, and our expectation for weak economic growth in 2013, restraining the company's discretionary cash flow generation. Rating Action On Dec. 19, 2012, Standard & Poor's Ratings Services affirmed all ratings on Stamford, Conn.-based Cenveo Inc. and removed them from CreditWatch with negative implications, where they were placed on Oct. 2, 2012. The outlook is negative. Rationale On Dec. 17, 2012, Cenveo announced that it had received consents to amend its existing credit agreement to reset certain covenant levels and allow for up to a $50 million dollar unsecured term loan to be repaid on terms similar to the 2013 notes. The company also placed a $15 million add-on secured term loan and announced that it had secured a commitment for a $50 million unsecured term loan due 2017. The company plans to use the proceeds along with availability under the company's revolving credit facility to repay in January the 7.875 notes that mature in December 2013. As of Nov. 29, 2012, $67.9 million of the 7.875% senior unsecured notes remained outstanding. These funding transactions will alleviate near-term liquidity pressures by addressing the 2013 maturities and increasing revolver availability as a result of looser covenants. Over the next year, we expect the company's leverage to remain high and interest coverage to remain below 2x. 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. We view Cenveo's management and governance as "fair." A midsize 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 for 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 the company will report a mid- to high-single-digit percent decline in revenue. We believe that EBITDA from continuing operations 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- to mid-single-digit percent rate. We expect EBITDA to fall at a low- to mid-single-digit percent rate as well. In the third quarter, revenue fell 5% because of lower direct mail volume and pricing pressure. EBITDA increased as a result of lower sales, general, and administrative and restructuring expenses. As of Sept. 30, 2012, leased-adjusted leverage was high at 7.0x and interest coverage was low at 1.7x, similar to levels from a year earlier. Despite some debt repayment, we expect leverage to remain high, largely because of EBITDA declines. We believe interest coverage will remain below 2x over the near term. The company converted about 29% of EBITDA to discretionary cash flow for the 12 months ended June 30, 2012. We expect the company to convert roughly 20% to 35% of EBITDA to discretionary cash flow in the full-year 2012 and 2013. We expect Cenveo to use discretionary cash flow primarily for debt repayment. Liquidity Cenveo has "adequate" sources of liquidity, per our criteria. Our assessment of the company's liquidity profile incorporates the following expectations and assumptions: -- We expect sources of liquidity over the next 12 months to exceed uses by over 1.2x. -- We would expect net sources to remain positive, even if EBITDA were to decline by 15%. -- In our view, the company can absorb low-probability, high-impact adversities over the near term due to our expectation of increased availability under the revolving credit facility. -- The company has sound relationships with its banks. On Sept. 30, 2012, Cenveo had $10 million in cash. Availability under its revolving credit facility was $26 million as of Nov. 6, 2012. Following the company's amendment of its credit agreement, we expect revolver availability to increase meaningfully. We expect the company to generate discretionary cash flow of roughly $40 million to $60 million in 2013. The company's margin of compliance with financial covenants was tight at slightly under 10% as of Sept. 30, 2012. The amended covenants will have the total leverage covenant step up to 6.5x at the end of 2012, then step down to 6.25x at the end of 2013 and to 6x at the end of the third quarter of 2014. At the end of 2012, we expect covenant headroom will be over 10% as a result of the amended covenant levels. The next debt maturity is in December 2014, when the company's revolving credit facility is due. The term loan has 1% amortization per year. Recovery analysis For the latest recovery analysis, see our recovery report on Cenveo, published July 11, 2012, on RatingsDirect. Outlook The negative outlook is based on our expectation that revenue may continue to fall as the company faces negative structural trends and economic pressures. We could lower the rating if weak operating performance deteriorates leading to declines in discretionary cash flow, covenant headroom under 10%, and tightening liquidity. We could revise the outlook to stable if the company improves its operating performance and establishes and maintains a cushion of compliance with covenants above 15%. Related Criteria And Research -- 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 -- 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; CreditWatch Action To From Cenveo Inc. Corporate Credit Rating B/Negative/-- B/Watch Neg/-- Cenveo Corp. Senior Secured Term loan BB- BB-/Watch Neg Recovery Rating 1 1 Revolver BB- BB-/Watch Neg Recovery Rating 1 1 Second-lien nts B- B-/Watch Neg Recovery Rating 5 5 Senior Unsecured CCC+ CCC+/Watch Neg Recovery Rating 6 6 Subordinated CCC+ CCC+/Watch Neg 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.