Fitch Rates R.R. Donnelley's Proposed Note Offering 'BBB'
2009-01-14 20:02:01 -
Fitch Ratings has assigned a 'BBB' rating to R.R. Donnelley & Sons Company's (RRD) 10-year senior unsecured note offering. Proceeds of the notes are expected to be used predominantly to repay commercial paper, revolver borrowings or for general corporate purposes. The Rating Outlook is Stable.
Fitch currently rates RRD as follows:
--Issuer Default Rating (IDR) 'BBB';
--Senior unsecured revolving credit facility 'BBB';
--Senior unsecured notes and debentures 'BBB';
--Short-term IDR 'F2'.
The bonds are expected to rank pari-passu with the existing unsecured debt. Similar to the existing bonds, covenants are limited. There is a limitation on liens of up to 15% of net tangible assets (in addition to standard carve outs) and a change of control provision that is triggered if any person becomes the beneficial owner of 50% or more of the voting stock and if RRD's rating is downgraded below investment grade (as defined). Other change of control triggers include, a majority change in the Board of Directors and/or if all or substantially all of RRD's assets are sold, followed by a downgrade below investment grade (as defined). Fitch notes that there appears to be no cross default or cross acceleration provisions. As proposed, this transaction also provides for step-up pricing if one or two of the ratings (as defined) on the notes drop below investment grade.
As Fitch expected, and evidenced by RRD's revised guidance for 2008 year end results (announced Jan. 9, 2009), the company endured very challenging conditions in the fourth quarter of 2008, and Fitch expects industry growth to be negative in 2009. Due to overcapacity, fragmentation, customer and supplier consolidation and technology advancements, Fitch expects pricing to remain pressured.
RRD is internationally diversified (approximately 26% of revenue) and generates significant free cash flow. Absent a financial policy shift, Fitch believes the company's credit profile can comfortably endure a global economic downturn in excess of what Fitch is forecasting for 2009 and 2010. On a macro basis, Fitch Ratings believes the world economy faces a severe global recession in 2009. Fitch forecasts that the contraction in output among the major advanced economies in aggregate will represent the steepest decline since the Second World War at about -1%. Fitch expects real Gross Domestic Product (GDP) in the U.S. to decline approximately 1.2%, while inflation is forecast to be 2.7%. The rating incorporates the potential that organic U.S. revenue could be down in the high single digits in any one year of a full U.S. economic downturn and in the low-to-mid double digits cumulatively. RRD can scale its costs back somewhat as revenue declines, but Fitch expects EBITDA to be down by a higher percentage than revenue in a downturn given the inherent operating leverage in the business.
Over time, better capitalized operators, such as RRD, should be able to organically track near real GDP by capturing share from smaller printers and also through acquisition of smaller, relatively inexpensive (after synergies) targets that could experience distress and come on the market in a downturn (providing a potential volume offset to pressured pricing). Fitch believes RRD is one of the few players that can invest in technology and enhanced service capabilities.
RRD stated that liquidity at year-end 2008 was supported by $315 million in cash and approximately $1.5 billion in availability under its $2 billion credit agreement. Fitch estimates 2008 year-end debt at approximately $4.2 billion and estimates year-end leverage to be around or below 2.5 times (x). Management has publicly reiterated its commitment to investment grade ratings several times in the past eighteen months. Credit metrics will likely fluctuate over time between low 'BBB' and high 'BBB' as RRD executes opportunistic acquisitions and then de-levers to create capacity for future transactions. While management does not specify an explicit leverage target, Fitch expects leverage to average below or around 3.0x over the intermediate term. Fitch expects RRD to continue to keep flexibility below the 3.0x range given the uncertainty and lack of visibility regarding economic conditions. If there were to be any leverage increases in the near-to-intermediate term, Fitch would expect them to be modest and to be derived predominantly from cyclically driven EBITDA weakness rather than increases in debt.
RRD is the largest commercial printer globally. The company's existing customer base consists of more than 40,000 companies, including more than 90% of Fortune 500 companies. None of the customers account for more than 10% of total revenue, and only 155 of RRD's customers generates annual revenues, for RRD, greater than $10 million.
For further information, please see Fitch's Sept. 30, 2008 Credit Analysis report available on the Fitch Ratings web site at www.fitchratings.com.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
Fitch Ratings
Rolando Larrondo, +1-212-908-9189 (New York)
Mike Simonton, CFA, +1-312-368-3138 (Chicago)
Cindy Stoller, +1-212-908-0526
(Media Relations, New York)
cindy.stoller@fitchratings.com
