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