R.R. Donnelley & Sons Co. Downgraded To 'B' From 'B+' On Weaker-Than-Expected Credit Measures; Outlook Stable
- U.S. print, digital, and supply chain solutions company R.R. Donnelley & Sons Co. has made less-than-expected progress in increasing revenue, expanding EBITDA margins, and lowering leverage after its divestments of LSC Communications Inc. and Donnelley Financial Solutions Inc.
- We expect R.R. Donnelley's operating performance to remain challenged as it competes with other companies in the secular declining print and print-related industry, resulting in sustained leverage above 5x through 2018.
- We are lowering our corporate credit rating to 'B' from 'B+', and our issue-level ratings on the company's senior secured asset-based lending credit facility to 'BB-' from 'BB' and on the senior unsecured notes to 'B' from 'B+'. The recovery ratings are unchanged.
- The stable rating outlook reflects our expectation that R.R. Donnelley will maintain adjusted leverage in the 5x area and adjusted free operating cash flow to debt above 5% over the next 12 months.
CHICAGO (S&P Global Ratings) Nov. 14, 2017--S&P Global Ratings today lowered its corporate credit rating on Chicago-based R.R. Donnelley & Sons Co. to 'B' from 'B+'. The rating outlook is stable. At the same time, we lowered our issue-level rating on the company's senior secured asset-based lending (ABL) credit facility to 'BB-' from 'BB'. The '1' recovery rating is unchanged, indicating our expectation for very high recovery (90%-100%; rounded estimate: 95%) of principal in the event of a payment default. We also lowered our issue-level rating on the company's senior unsecured debt to 'B' from 'B+'. The '4' recovery rating is unchanged, indicating our expectation for average recovery (30%-50%; rounded estimate: 35%) of principal in the event of a payment default. The downgrade reflects R.R. Donnelley's lower-than-expected operating performance and higher leverage profile as a stand-alone company after its divestitures of LSC Communications Inc. and Donnelley Financial Solutions Inc. in October 2016. Since the spin-off, the company has performed below our expectations, with flat revenue growth and an EBITDA margin roughly 50 basis points (bps) lower than we'd forecasted. In addition, the company has serviced additional post spin-off payouts to its divested entities over the past 12 months, which have hindered its ability to reduce leverage in line with our expectations. The stable rating outlook reflects our expectation that R.R. Donnelley will maintain adjusted leverage in the 5x area and FOCF to debt above 5% over the next 12 months. We could lower our corporate credit rating on R.R. Donnelley if the company's revenues or profitability declines such that we expect leverage to rise to the high-5x area or FOCF to debt to fall below 5%. We could also consider a downgrade if the company initiates any shareholder-rewarding programs or pursues large debt-financed acquisitions that change our view of its financial policy. Although an upgrade is unlikely over the next 12 months, we could raise the rating if we are convinced that revenue will grow at a low-single-digit percentage rate and the company will maintain EBITDA margins in the high-single-digit percentage area, leading to adjusted leverage declining to the mid-4x area.
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on the S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.
| Primary Credit Analyst: | David Snowden, CFA, Chicago (1) 312-233-7077; david.snowden@spglobal.com |
| Secondary Contact: | Minesh Patel, CFA, New York (1) 212-438-6410; minesh.patel@spglobal.com |
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