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Fitch Affirms R.R. Donnelley’s BB+ Default Rating, Classifies Outlook as Stable

May 14, 2012
NEW YORK—May 14, 2012—Fitch Ratings has affirmed R.R. Donnelley & Sons’ “BB+” issuer default rating (IDR). The rating outlook is stable. The ratings reflect the company’s intention to reduce its absolute levels of debt.

Given RRD’s cash flow generation, Fitch believes that the company can meet its pension funding requirements and reduce debt balances in order to get closer to the lower end of the company’s stated leverage target of 2.5-3.0x, which Fitch believes is appropriate for the ratings at this time.

As with ratings on any business facing secular challenges, Fitch may continue to tighten the targeted leverage metric for a given rating category as business risk increases.

Fitch believes that debt reduction will need to be a primary use of RRD’s free cash flow (FCF) going forward in order to maintain its current ratings. Given the secular challenges facing the company, deleveraging will primarily be driven through debt level reductions. There is no tolerance in the ratings for material share buy backs and/or increases in the current dividend level.

There is limited headroom within the ratings for the company to under perform Fitch expectations. The company has guided to flat to slight revenue growth and approximately $300 million in FCF (after dividends). Fitch believes this is achievable.

Revenue declines in the low to mid single digits over the next two quarters could result in a Negative Outlook. Fitch believes that continued revenue declines in the low to mid single digits would pressure cash flows and slow down absolute debt reduction.

The ratings also reflect:

• RRD’s scale and diverse product offering as the largest commercial printer in the United States and worldwide. The U.S. commercial printing market size is approximately $150 billion, and RRD has less than a 5 percent market share. RRD is one of few well-capitalized competitors in this highly fragmented and sizable industry. The significant addressable market share that RRD could capture from rivals may provide some offset to secular pressures.

• In Fitch’s view, more than 50 precent of RRD’s revenues face some degree of secular headwinds (catalogs, magazines, books, directories, variable, commercial and financial print). Certain sub-segments may not recover or exhibit positive growth characteristics going forward.

Fitch believes that continued pricing and volume pressure will challenge RRD’s ability to drive GDP-level organic revenue growth. Fitch’s base case model assumes that pressures in the books and directories segment accelerate and revenues in this business line declines in the mid teens starting in 2013.
 

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