Fitch Ratings has affirmed R.R. Donnelley & Sons' (RRD) Issuer Default Rating (IDR) at 'BBB' and assigned a 'BBB' rating to RRD's proposed note offering. Proceeds of the note offering are expected to be used to fund the tender offer on the 5.625% senior notes due January 2012 and 4.95% senior notes due May 2010.
Fitch has affirmed the following ratings:
--IDR at 'BBB';
--Senior unsecured revolving credit facility at 'BBB';
--Senior unsecured notes and debentures at 'BBB';
--Short-term IDR at 'F2';
--Commercial paper at 'F2'.
The Outlook remains Stable.
Recognizing that the commercial printing industry is highly cyclical and has the potential to be a declining business (even in periods of economic expansion) over the long term, the Stable Outlook reflects several key considerations:
--The company's revenue and EBITDA declined 19% and 30%, respectively, in the first six months of 2009 primarily due to cyclical factors. Fitch expects organic revenue to be down in the mid-to-high teens for 2009. While RRD can scale its costs back somewhat as revenue declines, Fitch expects EBITDA to be down by a higher percentage (around 2 times [x] greater) than revenue, as high as 35%-40%.
--Fitch acknowledges many of the company's key sub-segments are enduring secular pressure and may not recover or exhibit positive growth characteristics going forward.
--There is significant addressable market share that it could capture from rivals given it is one of few well-capitalized competitors in this highly fragmented and very large industry. The commercial printing market size is over $170 billion in the U.S. and RRD has less than 5% market share.
--Over the intermediate term, Fitch will look for evidence of the company's ability to capture share from weaker rivals that may exit the market or are unable invest in technology and enhanced service capabilities. Rating pressure could result if RRD is unable to capture share, either because the overall market declines so rapidly due to secular factors that share gains do not provide a meaningful offset, or because smaller rivals remain in the market longer and are more competitive than Fitch anticipates.
--There is limited to no room in the rating for the company to underperform Fitch's expectations or to implement any shareholder-friendly actions.
--Over the longer term, Fitch would expect the company to continue to deleverage and repay absolute levels of debt in order to position itself for the uncertainty regarding demand in certain of its core markets. Several years from now the appropriate leverage level for a 'BBB' rated company with RRD's business risk characteristics may be lower than its currently stated leverage range. Over the intermediate to long term, Fitch expects management's commitment to investment grade ratings to be evidenced by adherence to potentially even tighter leverage parameters should industry conditions deteriorate beyond current expectations. Fitch recognizes the company has the flexibility to reduce its dividend to enhance free cash flow.
RRD's free cash flow (FCF) for year-end 2008 (after dividends) was $474 million and approximately $1 billion as of last 12 months (LTM) ended June 30, 2009. Under Fitch's more conservative assumptions, Fitch expects 2009 FCF could be in the range of $500 million to $650 million, driven by working capital improvements, excluding the impact of the tax refund received by RRD and assuming no change to the dividend policy. Liquidity at the end of the second-quarter 2009 was further supported by cash of $471 million (approximately $400 million is located outside of the U.S.). Liquidity is supplemented by approximately $2 billion in availability under RRD's $2 billion credit agreement, which expires January 2012. Near-term maturities include the $500 million note maturing in May 2010 and the $625 million note (both subject to the current tender offer) and the credit facility maturing in January 2012. The company's next maturity is its $600 million senior note due April 2014. Fitch believes the company has sufficient flexibility inside its 4.0 times (x) credit facility leverage covenant and does not expect future pension contributions to be a material drain on liquidity.
As of June 30, 2009, RRD had total debt of $3.6 billion and LTM unadjusted gross leverage of around 2.5x. Fitch expects leverage to weaken due to EBITDA declines, and expects LTM leverage could temporarily exceed 3.0x in the periods between Sept. 30, 2009 and March 31, 2010 even if the company dedicates most FCF to debt repayment. Management has reiterated its commitment to investment grade ratings numerous times in recent periods and stated its plans to operate in a leverage range of 2.0x to 2.5x, realizing that the cyclical downturn may temporarily push leverage above 2.5x.
The bonds are expected to rank pari-passu with the existing unsecured debt. Similar to the existing bonds, covenants are limited. There is a limitation on liens of up to 15% of net tangible assets (in addition to standard carve outs) and a change of control provision that is triggered if any person becomes the beneficial owner of 50% or more of the voting stock and if RRD's rating is downgraded below investment grade (as defined). Other change of control triggers include a majority change in the Board of Directors and/or if all or substantially all of RRD's assets are sold, followed by a downgrade below investment grade (as defined). Fitch notes that there appears to be no cross default or cross acceleration provisions.
The tender offer made by RRD includes an offer to purchase any and all of the $625 million 5.625% senior notes due 2012 and an offer to purchase a maximum of $125 million of the $500 million 4.95% senior notes due 2010. The tender offer provides for $1,015 for every $1,000 of 5.625% notes tendered and $990 for every $1,000 of 4.95% notes tendered plus an early tender premium of $20 per $1,000 for the 4.95% notes if tendered by September 1. The 5.625% senior notes offer is scheduled to expire on August 26 and the 4.95% offer is scheduled to expire on September 16.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 'www.fitchratings.com'. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Contacts:
Fitch Ratings, New York
Rolando Larrondo, +1-212-908-9189
Mike
Simonton, CFA, +1-312-368-3138 (Chicago)
Cindy Stoller,
+1-212-908-0526 (Media Relations)
cindy.stoller@fitchratings.com