Fitch Affirms R.R. Donnelley’s BB+ Default Rating, Classifies Outlook as StableMay 14, 2012
• Given the secular challenges facing the company’s business, Fitch does not expect any positive rating momentum in the near term.
• Increased share buyback activity or revenue declines in the low to mid single digits, whether due to secular/cyclical issues, would pressure the ratings.
Fitch calculates RRD's FCF (after dividends) for the last 12 months ended March 31, 2012 at $455 million. Fitch expects FCF to be approximately $300 million in 2012. RRD's pension was $1 billion underfunded at the end of 2011. The company intends to contribute $215 million to its pension funds in 2012. The 2012 contribution is reflected in Fitch’s FCF expectations.
As of March 31, 2012, liquidity was supported by $415 million in cash ($370 million located outside of the U.S.) and $1.2 billion available under its $1.75 billion revolver that matures in December 2013.
As of March 31, 2012, there is approximately $327 million in revolver debt balance outstanding, reflecting seasonal working capital balances and borrowing used to fund the January 2012 $160 million maturity. After the revolver balance has been repaid, Fitch expects the company to continue to reduce debt through repurchases of notes in the open market or via tender offers.
RRD's next bond maturity is its $258 million 4.95% notes due in April 2014, $300 million 5.5% notes due in May 2015 and its $347 million 8.6% notes due in August 2016.
As of March 31, 2012, the company had total debt of $3.8 billion.
The company calculates leverage at 3.0x as of March 31, 2012, excluding restructuring cost. Given the secular issues facing RRD, Fitch will no longer adjust EBITDA for restructuring charges, resulting in an unadjusted gross leverage ratio of 3.2x. Fitch believes restructuring charges will be an ongoing expense. While current leverage is high for the rating, Fitch expects leverage to be below 3.0x before year end.
Fitch notes that liens are not permitted under the existing bonds, unless a pari passu lien is granted to the notes. There is also a general lien basket that limits liens (and sale-leaseback transactions) to 15% of net tangible assets (there is a 10% limit for the notes maturing in 2021, 2029, and 2031).
While the company's credit facility contains a 4.0x maximum leverage covenant, current bondholders do not benefit from any material unsecured debt or unsecured subsidiary guarantee restrictive covenants. Fitch notes that in the event that the credit facility became guaranteed by the operating subsidiaries of RRD (noting that the revolver does not expire until Dec. 17, 2013), Fitch would expect to notch down the unsecured notes, reflecting this subordination.
Fitch has affirmed R.R. Donnelley's ratings as follows:
- IDR at BB+;
- Senior unsecured revolving credit facility at BB+;
- Senior unsecured notes and debentures at BB+.
Fitch has also withdrawn the following ratings:
- Short-term IDR, B;
- Commercial paper, B.