Fitch Revises R.R. Donnelley’s Outlook from Stable to NegativeAugust 8, 2012
• Ratings may be stabilized if the company executes on its intention to reduce absolute levels of debt and is able to demonstrate organic revenue growth.
• Sustained revenue declines and/or heightened concerns regarding secular challenges would likely result in a one notch rating downgrade.
Fitch calculates RRD’s FCF (after dividends) for the last 12 months ended June 30, 2012 at $381 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 $205 million to its various retirement funds, including its pension, in 2012. The 2012 contribution is reflected in Fitch’s FCF expectations. The updated contributions reflect the passing of the Surface Transportation Extension Act of 2012, which provided pension funding relief.
As of June 30, 2012, liquidity was supported by $369 million in cash ($338 million located outside of the U.S.) and $1 billion available under its $1.75 billion revolver that matures in December 2013.
As of June 30, 2012, there is approximately $325 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 percent notes due in April 2014, $300 million 5.5 percent notes due in May 2015 and its $347 million 8.6 percent notes due in August 2016.
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 $140 billion. 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% 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.
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+.