New York, New York, USA, 18 May 2010 -- (BUSINESS WIRE) -- Fitch Ratings has downgraded the ratings on R.R. Donnelley & Sons Company (RRD) as follows:
-- Issuer Default Rating (IDR) to BBB- from BBB;
-- Senior unsecured revolving credit facility to BBB- from BBB;
-- Senior unsecured notes and debentures to BBB- from BBB;
-- Short-term IDR to F3 from F2;
-- Commercial paper to F3 from F2.
The rating outlook is stable.
The downgrade reflects the cyclical volatility, long-term organic revenue headwinds in some key categories and the company's role as a consolidator in the fragmented commercial printing space. Fitch believes that the long-term business and financial risk profile for RRD is consistent with a solid BBB- rating.
RRD's ratings reflect the following key considerations:
-- The ratings continue to consider RRD's scale and diverse product offering as the largest commercial printer in the United States and worldwide. Diversification extends geographically and across 15 core print products and related services. The ratings are also supported by the company's adequate financial flexibility and liquidity and its ability to generate meaningful free cash flow (FCF) even during a downturn.
-- Fitch believes many of the company's key subsegments are enduring secular pressure and may not recover or exhibit positive growth characteristics going forward. Fitch believes this, along with continued pricing pressure, will challenge RRD's ability to drive organic revenue growth. While RRD can scale its costs back somewhat as revenue decreases, Fitch expects EBITDA to be down by a higher percentage (around 2x greater) than revenue.
-- The commercial printing market size is approximately USD 160 billion in the United States, and RRD has less than 5% market share. RRD is one of few well-capitalized competitors in this highly fragmented and very large industry. The significant addressable market share that RRD could capture from rivals provides some offset to the secular pressures.
-- In addition, the ratings incorporate RRD's role as a consolidator in the commercial printing space. Fitch expects that organic revenue declines could be supplemented by acquisitions of relatively inexpensive (after synergies) targets that could experience distress and come on the market. The rating incorporates Fitch's expectation that any significant future acquisition would likely include an equity component, helping to maintain liquidity at RRD and minimize the potential for increased leverage.
-- Fitch believes that the company is committed to maintaining an investment grade rating. Gross unadjusted leverage for 2010 is expected to remain between 2.5x and 2.75x, which is solid for its BBB- rating. Several years from now the appropriate leverage level for an investment grade rated company with RRD's business risk characteristics may be lower than its currently stated leverage range of 2.0x to 2.5x. Over the longer term, Fitch would expect the company to continue to repay absolute levels of debt and focus on deleveraging in order to position itself for the uncertainty regarding demand in certain of its core markets.
An upgrade is unlikely in the near term given Fitch's projected operating trends and credit metrics for RRD. Rating pressures would likely be driven by cyclical or secular operating pressures and/or acquisitions pushing leverage materially above 3x. While the company is strongly positioned in its rating, Fitch expects any shareholder friendly actions (increased dividends and/or share buys backs) to be modest.
Fitch expects RRD's organic revenue to be flat in 2010. While management's revenue outlook is more optimistic going forward, Fitch remains cautious regarding the timing of the economy's recovery. Fitch recognizes that organic revenue declines may be offset by the Bowne acquisition, which is expected to close in the second half of the year.
RRD's FCF (after dividends) for the last 12 months (LTM) ended 31 March 2010, was approximately USD 570 million. Fitch's 2010 FCF expectations of USD 300-400 million assume a low working capital drain (less than USD 50 million), capital expenditures in line with 2009 (approximately USD 200 million) and no changes to the dividend policy (approximately USD 220 million). The company indicated that it expects to make cash contributions to its pension plans of approximately USD 22 million in 2010. Fitch has modeled cash contributions to pension plans to increase in 2011 in the range of USD 75-100 million. These estimates may materially differ from actual funding requirements due to the many assumptions that are used to calculate the required cash contribution amount, including discount rates and investment performance.
Liquidity at the end of March 2010 was further supported by cash of USD 451 million (Fitch believes the vast majority of this cash is located outside of the United States), and approximately USD 1.3 billion in availability under RRD's USD 2 billion credit agreement, which expires January 2012. The reduction in availability is being driven predominately by the credit agreement's leverage covenant of 4.0x. Fitch expects this covenant to continue to reduce available capacity on the revolver throughout 2010 and into 2011. The USD 2 billion revolver provides support to the company's USD 2 billion commercial paper program.
Near-term maturities include USD 159 million in notes and the credit facility maturing in January 2012. RRD's next maturity is its USD 600 million senior note due in April 2014. As of 31 March 2010, the company had total debt of USD 3.3 billion and unadjusted gross leverage of 2.5x.
The rating action reflects the application of Fitch's current criteria, which are available at www.fitchratings.com and specifically include "Corporate Rating Methodology" (24 November 2009) and "Liquidity Considerations for Corporate Issuers" (12 June 2007).
Additional information is available at www.fitchratings.com.