Moody's downgrades Cenveo's corporate family rating to Caa1 from B3 on opinion that company's capital structure may not be sustainable
November 13, 2013
– Moody's Investors Service (Moody's) downgraded Cenveo, Inc.'s (Cenveo) corporate family rating (CFR) to Caa1 from B3, and probability of default rating (PDR) to Caa1-PD from B3-PD. At the same time, Moody's downgraded the company's senior secured term loan to B2 from Ba3, its senior secured second lien notes to Caa1 from B3 and its senior unsecured notes to Caa3 from Caa2. Moody's affirmed Cenveo's speculative grade liquidity (SGL) rating at SGL-3 (adequate liquidity). The outlook is now stable. The action concludes a review initiated on August 26, 2013.
The ratings downgrades result from Moody's opinion that Cenveo's capital structure may not be sustainable. Moody's anticipates Debt-to-EBITDA leverage remaining in the 6x range for the foreseeable future as revenues decline organically and some debt is repaid from modest free cash flow. Since the enterprise valuation is uncertain and the 6x EBITDA multiple may roughly correspond with a potential enterprise multiple, it is not clear at this juncture whether Cenveo will be able to refinance its debts without a distressed exchange.
Cenveo is in the midst of a protracted business restructuring with myriad execution risks and an uncertain outcome. The recent National Envelope acquisition continues the company's transformation such that envelope converting now represents nearly 50% of pro forma revenues, with commercial printing's contribution declining towards 30%. However, envelope converting faces secular pressures which echo those of commercial print and the two industries' pricing and volume trends are highly correlated. Accordingly, it remains to be seen whether the change in revenue composition will be beneficial.
Since, pro forma for recent and pending acquisition and divestiture activity, Cenveo will generate modest levels of free cash flow and does not face maturing debts until early 2017, the company has adequate liquidity and has time to substantiate its cash flow self-sustainability and enterprise value, the outlook is stable.
Cenveo Corporation is a wholly-owned subsidiary of Cenveo, Inc. (Cenveo), a publicly traded holding company. While all debt instruments are issued by Cenveo Corporation, since Cenveo Inc. guarantees all of Cenveo Corporation's debt and financial statements are issued only by Cenveo Inc., Moody's maintains corporate-level ratings and the associated outlook at Cenveo Inc.
The following summarizes Cenveo's ratings and today's rating actions:
..Issuer: Cenveo, Inc.
.... Corporate Family Rating: Downgraded to Caa1 from B3
.... Probability of Default Rating: Downgraded to Caa1-PD from B3-PD
.Speculative Grade Liquidity Rating: Affirmed at SGL-3
....Outlook: Changed To Stable From Under Review
..Issuer: Cenveo Corporation
....Senior Secured Bank Credit Facility Apr 16, 2020: Downgraded to B2 (LGD2, 26%) from Ba3 (LGD2, 23%)
....Senior Secured Regular Bond/Debenture Feb 1, 2018: Downgraded to Caa1 (LGD4, 55%) from B3 (LGD4, 54%)
....Senior Unsecured Regular Bond/Debenture May 15, 2017: Downgraded to Caa3 (LGD5, 85%) from Caa2 (LGD5, 85%)
Cenveo's Caa1 corporate family rating stems primarily from uncertainty that its capital structure is sustainable. With estimated 2014/2015 pro forma leverage of Debt-to-EBITDA in the low-to-mid 6x range and with enterprise valuations being uncertain and potentially being at similar multiples, refinancing without a distressed exchange is questionable, especially as both envelope converting and commercial printing are in secular decline. Cenveo is involved in a protracted business and asset portfolio restructuring aimed at diversifying away from legacy commercial printing activities, the outcome of which is uncertain. The rating benefits from the company's ability to generate free cash flow and from an absence of near term debt maturities, both of which provide time to complete the business restructuring and preclude a potential financial restructuring.
The outlook is stable because Cenveo has time to continue its business restructuring initiatives and because leverage and coverage are expected to be relatively stable through 2014/2015.
What Could Change the Rating - Up
Should it be clear that the company is cash flow self-sustainable and it is likely they'll be able to refinance their debts, positive ratings actions would be likely.
What Could Change the Rating - Down
Cenveo's ratings could be downgraded if liquidity and refinance issues arise in advance of the company's cash flow self-sufficiency being proven.
Headquartered in Stamford, Connecticut, Cenveo Corporation, a wholly-owned subsidiary of Cenveo, Inc. (Cenveo, a publicly traded holding company), with estimated annual pro forma revenues of ~$2.0 billion, is involved in envelope converting (~50% of revenue, pro forma for the recent National Envelope acquisition), commercial printing and related activities (~30% of pro forma revenues), labels (~15% of pro forma revenues) and packaging (~5% of pro forma revenues).
The principal methodology used in this rating was the Global Publishing Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.