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Fitch Downgrades RR Donnelley’s Rating; Outlook Remains Negative

September 24, 2012
NEW YORK—Sept. 24, 2012—Fitch Ratings has assigned a “BBB-” rating to R.R. Donnelley & Sons (RRD) proposed senior secured bank credit facility of up to $1.25 billion. Fitch has also downgraded RRD’s Issuer Default Rating (IDR) and senior unsecured notes and debentures to “BB” from “BB+.” The Rating Outlook remains Negative.

The new secured facility will replace the $1.75 billion unsecured credit facility, which was due to expire in December 2013. While the total facility has been reduced, Fitch notes that availability under the $1.75 billion had been constrained by the bank agreement leverage covenant. Fitch believes that the $1.25 billion secured facility will provide sufficient liquidity to support operations and investments. Terms of the proposed credit facility have not been disclosed.

The ratings and Negative Outlook reflect the secular challenges facing RRD. In Fitch’s view, more than 50 percent of RRD’s revenues face some degree of secular headwinds (catalogs, magazines, books, directories, variable, commercial and financial print). Fitch does not believe certain sub-segments will exhibit positive organic growth going forward.

Fitch believes RRD carries a high level of debt given the secular challenges facing the company. As of June 30, 2012, RRD had total debt of $3.8 billion. As with other issuers and segments with uncertain business prospects, Fitch will weight secular issues, organic growth and absolute levels of debt reduction more prominently than backward looking leverage metrics.

Based on current expectations, Fitch believes that the company has the financial flexibility to reduce debt levels; however, Fitch is concerned that an acceleration in secular driven revenues declines may impair that ability.

Fitch believes that the company’s financial and management strategies are appropriate and prudent for the current ratings. Management has publicly stated its intentions to reduce absolute levels of debt. Fitch calculates unadjusted gross leverage (without adding back restructuring charges) at 3.2 times (x). Debt reduction will need to be a primary use of free cash flow (FCF) going forward in order to maintain current ratings. There is no tolerance in the ratings for material share buy backs and/or increases in the current dividend level.

RRD expects approximately $300 million in FCF (after dividends). Fitch believes this is achievable. Fitch expects 2012 full year revenues to be down in the low single digits, and EBITDA to remain unchanged relative to 2011 EBITDA of $1.2 billion. 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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