TEXT-S&P removes Cenveo ratings from watch, outlook is negative

Wed Dec 19, 2012 4:43pm EST

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.
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