Fitch assigns RR Donnelley's proposed seven-year US$300M note offering a BB+ rating, agency views continued pricing, volume pressure to challenge company's ability to drive revenue growth
February 28, 2012
– Fitch Ratings has assigned R.R. Donnelley & Sons Company's (RRD; 'BB+'/Stable) proposed seven-year $300 million note offering a 'BB+' rating. The proceeds are expected to be used to partially fund tender offers for up to $350 million of the 4.95% unsecured notes due April 2014 ($600 million) and 5.50% unsecured notes due May 2015 ($400 million). A full list of ratings is at the end of this release.
RRD will issue the senior notes under its existing indenture dated January 3, 2007 (and subsequent supplementals). The notes will rank pari-passu with the existing unsecured debt. Like the existing notes, the new notes will not be guaranteed by any of RRD's subsidiaries.
The proposed terms are similar to that of previously issued notes, including i) a limitation on liens of up to 15% of net tangible assets (in addition to standard carveouts; and ii) an obligation of RRD to repurchase the notes at 101% upon a change of control. A change of control provision is triggered if a) any person becomes the beneficial owner of 50% or more of the voting stock, b) a majority change in the Board of Directors and/or c) if all or substantially all of RRD's assets are sold. Similar to the existing bonds, there are no financial covenants.
Fitch views the proposed transaction as a modest credit positive in that it reduces maturities in the medium term. Fitch estimates approximately $1.0 billion of maturities through 2015, which includes revolving credit facility balance of $288 million due in 2013 and the remaining $650 million balance on the 2014 and 2015 unsecured notes. The year-end debt balance of approximately $3.7 billion remains largely unchanged. Fitch assumes the difference between the amount tendered and the proposed issuance will be funded with RRD's revolving credit facility.
Fitch views RRD's current liquidity as adequate. At December 31 2011, the company had $450 million in cash and approximately $1.1 billion available under its $1.75 billion credit facility (pro forma for $159 million borrowing used to pay down January 2012 maturity and $64 million incremental borrowing related to tender offer). Fitch calculates 2011 FCF (after dividends) at $490 million, however, 2012 FCF will be affected by an additional pre-tax $200 million ($254 million in total) pension and 401(k) contribution.
At December 31, 2011, Fitch calculated gross unadjusted leverage to be 2.8 times (x), within the company's stated leverage target of 2.5x to 3.0x. In the near term, leverage could average at least 0.25x more than the company's target without affecting its 'BB+' credit rating.
RRD's ratings reflect the following key considerations:
--RRD's scale and diverse product offering as the largest commercial printer in the US and worldwide.
--The commercial printing market size is approximately $140 billion in the US, and RRD has less than 5% market share. RRD is one of few well-capitalized competitors in this highly fragmented and large industry. The significant addressable market share that RRD could capture from rivals provides some offset to the secular pressures.
--In Fitch's view, slightly more than 50% of R.R. Donnelley's revenues face some degree of secular headwinds (catalogs, magazines, books, directories, variable, commercial and financial print). Fitch believes that continued pricing and volume pressure will challenge RRD's ability to drive GDP-level organic revenue growth.
--RRD demonstrated its cyclical nature through the downturn, with revenues declining 15% and Fitch EBITDA declining 26% in 2009. The company's recovery has been slower than other non-advertising media-related subsectors.
Fitch considers an upgrade unlikely until secular trends stabilize.
Negative triggers that would pressure the rating include increased share buyback activity or secular/cyclical declines in RRD's print division, which drove leverage sustainably to or above the 3.5x range.
Fitch currently rates RRD as follows:
--Long-term IDR 'BB+'; Stable Outlook
--Senior unsecured revolving credit facility at 'BB+';
--Senior unsecured notes and debentures at 'BB+';
--Short-term IDR at 'B';
--Commercial paper at 'B'.
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
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