-- 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.
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.
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
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.
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,
-- 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
Corporate Credit Rating CCC-/Watch Dev/-- CCC-/Watch Pos/--
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