September 19, 2012 / 6:30 PM / 5 years ago

TEXT-S&P rates RR Donnelley credit facility 'BBB-'

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Sept 19 - Overview
     -- U.S.-based commercial printing company R.R. Donnelley has proposed the 
issuance of a senior secured revolving credit facility of up to $1.25 billion.
     -- We are assigning the revolving credit facility our 'BBB-' issue-level 
rating and recovery rating of '1'.
     -- At the same time, we revised our recovery ratings on the company's 
existing senior unsecured debt to '4' from '3'. The 'BB' issue-level rating 
remains unchanged.
     -- The outlook is stable, reflecting our view that revenue declines will 
not accelerate, EBITDA will rise slightly in 2012 with lower restructuring 
charges, and that leverage will gradually decline to the high 3x area by the 
end of 2013.

Rating Action
On Sept. 19, 2012, Standard & Poor's Ratings Services assigned R.R. Donnelley 
& Sons Co. (RRD) proposed senior secured revolving credit facility of up
to $1.25 billion, an issue-level rating of 'BBB-' (two notches higher than the 
'BB' corporate credit rating on the company) with a recovery rating of '1', 
indicating our expectation of very high (90% to 100%) recovery for lenders in 
the event of a payment default. The new revolver will replace the existing 
$1.75 billion senior unsecured revolving credit facility, which expires in 
December 2013. With $325 million drawn at June 30, 2012, additional 
availability under the current facility was restricted to about $1 billion by 
outstanding balances on the facility and the financial covenants as of June 
30, 2012.

At the same time, we revised our recovery rating on the company's senior 
unsecured bonds to '4' (30% to 50% recovery expectation) from '3' (50% to 70%) 
due to new secured debt reducing the total value available to the unsecured 
debt. The 'BB' issue-level rating on those bonds remains unchanged, as we do 
not notch our issue ratings from the corporate credit rating for a recovery 
rating of either '3' or '4'.

In addition, we have affirmed our 'BB' corporate credit rating on RRD. The 
outlook is stable.

Rationale
Our rating on Chicago-based R.R. Donnelley & Sons (RRD) reflects the company's 
positive cash flow generation despite revenue declines, and our expectation 
that leverage will decline to the high 3x area over the near-term, provided 
that economic and pricing pressures do not worsen. We regard the company's 
financial risk profile as "significant" (based on our criteria). Our "fair" 
business risk profile reflects RRD's market position and efficiencies 
associated with its critical mass. The company faces secular declines in 
several of its products and pricing pressure because of industry overcapacity. 
We believe that these trends could cause RRD's organic revenue to decline over 
the near term. 

The printing industry has steadily lost ground to electronic distribution of 
content and online advertising. As a result, it has been afflicted by 
overcapacity, chronic pricing pressure, and the need to continuously take out 
costs. RRD is the largest participant in the industry, with broad-based 
services that address a variety of end markets. RRD's size confers important 
efficiencies, the capacity to provide one-stop service to clients, the ability 
to invest in leading technology, and the ability to cope with pricing pressure 
more successfully than many of its competitors. Nevertheless, several of its 
important end markets, notably the magazine, retail inserts, directory, and 
book businesses, are subject to long-term adverse fundamentals. Industry 
volume shrinkage is likely to continue to necessitate capacity downsizing and 
restructuring charges.

Our base-case scenario incorporates our expectation that revenue could decline 
at a low-single-digit percent rate for the full year, despite recent customer 
wins. We believe that EBITDA will be relatively flat this year. We assume 
modest EBITDA margin expansion based on the potential for lower restructuring 
charges in 2012 following high restructuring expenses in 2011 related to the 
acquisition of Bowne & Co. Inc. We expect revenue could be flat or decline at 
a low-single-digit percentage rate in 2013 and for EBITDA to decline at a low- 
to mid-single-digit percentage rate, which would cause EBITDA margin gains in 
2012 to reverse.

In the second quarter, revenue declined 3.6%. EBITDA, which we calculate 
including restructuring charges, increased 4.3%, partially because of lower 
restructuring charges. The EBITDA margin grew to 11.1% in the last 12 months 
ended June 30, 2012, from 10.9% in the same period last year. RRD's leverage 
(adjusted primarily for pension and lease obligations and including 
restructuring charges) was 4.3x for the 12 months ended June 30, 2012. 
Leverage was above the adjusted debt-to-EBITDA range of between 3x and 4x that 
we associate with a significant financial risk profile. Management has stated 
that it intends to maintain a leverage target of 2.5x to 3.0x, according to 
its calculations, which excludes restructuring charges and pension and lease 
adjustments. The company also stated that it intends to pay down debt this 
year. In November 2011, management announced that it is freezing its pension 
plan. Restructuring charges were relatively high in the last 12 months ended 
June 30, 2012, because of the acquisition of Bowne in November 2010. We expect 
that leverage will decline to the high 3x area by the end of 2012 and remain 
at that level in 2013, assuming that restructuring charges normalize and the 
company pays back some debt with free cash flow. Further weakening of the 
economy, coupled with additional restructuring charges by the company, could 
cause us to revise our leverage assumptions. The company converted about 32% 
of EBITDA to discretionary cash flow at June 30, 2012. We expect the company 
to convert roughly 25% of EBITDA to discretionary cash flow this year.

Liquidity
Pro forma for the proposed revolving credit facility, RRD has "adequate" 
liquidity, in our view, to cover its needs over the next 12 months, even with 
moderate unforeseen EBITDA declines. Our assessment of RRD's liquidity profile 
incorporates the following expectations and assumptions:
     -- We expect sources to cover uses by more than 1.2x for the upcoming 12 
months.
     -- We believe sources minus uses would remain positive if EBITDA were to 
drop by 15%.
     -- Compliance with maintenance covenants would survive a 15% decline in 
EBITDA.
     -- We believe the company could absorb high-impact, low-probability 
events without refinancing.

We expect RRD to generate positive discretionary cash flow of roughly $300 
million for the full year after annual capital expenditures of roughly $200 
million to $225 million, and dividend payments of roughly $190 million. We 
expect the company to generate about $300 million in discretionary cash flow 
in 2013, benefiting from recent pension legislation that relaxes a pension's 
sponsor's cash funding requirements, but offset by our expectation of lower 
EBITDA. RRD does not have any significant near-term maturities. The proposed 
senior secured revolver of up to $1.25 billion will replace the current $1.75 
billion unsecured revolver, which matures in December 2013. As of June 30, 
2012, additional availability under that revolver was restricted to about $1 
billion by outstanding balances on the facility and the financial covenants. 
Proposed covenants include a 3.75x total leverage ratio (versus 4x for the 
current facility) and a 3.0x interest coverage covenant (similar for the 
current facility). The company had $325 million drawn under the current 
revolver and $369 million of cash on its balance sheet as of June 30, 2012.

Recovery analysis
For the latest recovery analysis, see Standard & Poor's recovery report on 
Donnelley, to be published on RatingsDirect as soon as possible following the 
release of this report.

Outlook
The stable rating outlook reflects our expectation that the company's revenue, 
while pressured, will not fall precipitously and that debt repayment from cash 
flow will facilitate leverage declining to the high 3x area.

We could lower the rating if we conclude that secular risks facing the company 
have increased and could cause organic revenue to decline at a brisker pace or 
that leverage will be chronically above 4x with little prospect for 
improvement. This could occur if revenue were to decline at a mid-single-digit 
percent rate and if the company's EBITDA margin were to decline. We could 
raise the rating if we become convinced that operating performance and 
industry conditions have stabilized, neither of which we regard as likely over 
the intermediate term, coupled with a commitment to debt repayment.

Related Criteria And Research
     -- Liquidity Descriptors for Global Corporate Issuers, Sept. 28, 2011
     -- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade 
Credits, May 13, 2008

Ratings List

Ratings Affirmed
                                        To                 From
R.R. Donnelley & Sons Co.
 Corporate Credit Rating                BB/Stable/--       
 Senior Unsecured                       BB                 
   Recovery Rating                      4                  3

New Rating

R.R. Donnelley & Sons Co.
 Up to $1.25B revolver due 2017         BBB-               
   Recovery Rating                      1                  
 



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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