S&P Rates RR Donnelley Secured Credit Facility BBB-
Standard & Poor’s Ratings Services assigned U.S.-based commercial printing company R.R. Donnelley & Sons’ 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.
S&P said its rating reflects the company’s positive cash-flow generation despite revenue declines, and its expectation that leverage will decline to the high 3x area over the near-term, provided that economic and pricing pressures do not worsen. S&P regards the company’s financial risk profile as “significant” (based on its criteria). Its “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. S&P said it believes 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 a large 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.