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15 Nov 2005
MOODY'S ASSIGNS RATINGS TO CLARKE AMERICAN (B1 SR. SECURED CREDIT FACILITY; B2 SR NOTES); OUTLOOK IS STABLE
Approximately $655 Million of Debt Securities Affected
New York, November 15, 2005 -- Moody's Investors Service assigned ratings to Clarke American Corp.'s
("Clarke") debt to be issued in connection with M&F Worldwide
Corp.'s ("M&F") $800 million acquisition
of the company from a subsidiary of Honeywell International Inc.
("Honeywell"; A2/Prime-1). This is the
first time Moody's has rated debt issued by Clarke. The ratings
reflect the company's high leverage and significant business risk
associated with the company's core check printing operations due
to the ongoing erosion in demand for checks as consumers and businesses
shift to electronic payment formats. The ratings outlook is stable.
Moody's assigned the following ratings:
-B1 rating to the $480 million guaranteed senior secured
credit facility consisting of:
$40 million revolver maturing five years from closing
$440 million term loan B maturing six years from closing
- B2 rating to the $175 million guaranteed senior unsecured
notes maturing eight years from closing
- B1 Corporate Family Rating
- SGL-2 Speculative-Grade Liquidity Rating
The ratings reflect Clarke's high leverage, significant level
of business risk, limited product diversity and a concentrated customer
base. Debt at closing of the acquisition will represent a high
4.8x EBITDA (calculated including operating leases and Moody's
other standard adjustments). Moody's is concerned that the
decline in physical check demand (averaging approximately 4% per
year) as consumers adopt less costly and more convenient alternative payment
forms such as electronic transfers and debit and credit cards will continue
and ultimately accelerate, thereby raising the risk of erosion in
Clarke's revenue base. This can prompt investments outside
traditional areas of expertise in an effort to find alternative revenue
sources. Declining check demand also sustains excess industry capacity
and downward pressure on check product prices. Clarke's significantly
higher leverage than its two primary and financially stronger competitors
provides less flexibility to manage these business risks.
Revenue concentration in printed checks and related services is high while
the financial institution division constitutes a greater share of revenues
(84%) than competitors. Clarke is more exposed to the price
and volume pressures arising from the increase in customer bargaining
power accompanying financial industry consolidation. Customer concentration
is high with 43% of revenues derived from the 10 largest financial
institution clients and Bank of America ("BofA"; senior
unsecured Aa2/stable) accounting for a significant portion of sales.
As evidence, one client has chosen not to renew its contract with
Clarke expiring at the end of 2005. Moody's believes BofA's
effective preclusion from any additional large bank acquisitions due to
the national 10% deposit ceiling could affect a traditional contributor
to Clarke's revenue growth.
In addition to interest from the proposed debt offerings, several
factors will potentially influence Clarke's cash flow in the near
term. Clarke will have a significant cash tax burden (subject to
generating taxable income) that will limit the EBITDA to cash flow conversion.
Management expects to increase growth-related capital expenditures
in the next few years to enhance customer relationship tools, call
routing capabilities and client web site interconnectivity. While
a near term drag on cash flow, these investments should enhance
longer-term revenue potential. Term loan amortization ($15
million in 2006) will step up by $5 million per year through maturity,
increasing the company's vulnerability to operating shortfalls and
diminishing flexibility to meet customer requests for up-front
contract acquisition or renewal payments should cash flow fall short of
The ratings more favorably reflect the company's strong market position
in the check printing business and management's historical capability
to grow revenues notwithstanding the pressure from declining check volumes
and prices. While the check printing industry is mature and has
undergone considerable consolidation, the remaining participants
have demonstrated an ability to reduce costs. This has translated
into sizable market positions and a good track record of cash flow generation.
Clarke believes its focus on helping financial institution clients grow
deposit accounts creates a more value added relationship that improves
customer retention. Integration into financial institutions'
Internet and phone check ordering systems creates frequent contact with
the end users of checks. Clarke expects to continue to opportunistically
leverage this interaction to offer enhanced delivery and service options
(which account for a significant source of earnings) that increase average
order size and to provide direct marketing services on behalf of financial
Clarke also benefits from its long-standing relationship with BofA
whose traditional focus on retail client base expansion supplemented by
acquisitions has contributed significantly to Clarke's revenue growth.
Clarke became BofA's sole source check supplier in 2003.
The SGL-2 rating reflects the company's "good"
liquidity position. Clarke will have a minimal cash balance at
closing with internal liquidity provided by free cash flow after interest,
taxes, and capital expenditures of $25-30 million
in 2006. None of the company's top 10 clients have a contract
expiring within the next 12 months (except, as previously mentioned,
the client that is not renewing its' contract at the end of 2005),
which diminishes the likelihood of a spike in contract renewal payments.
Revenues are slightly lower than average in the calendar fourth quarter
but otherwise exhibit little seasonal fluctuation. Working capital
swings traditionally fall within a $10-12 million range.
Moody's expects free cash flow to satisfy the scheduled $15
million term loan amortization in 2006.
The company is expected to have a $2 million draw on the $40
million revolver at closing but otherwise minimal usage to smooth working
capital flows. Moody's anticipates the company will maintain
compliance with bank covenants, which are expected to be based on
a cushion to the projections provided to the bank group. Because
substantially all assets are pledged to the bank facility, Moody's
believes the potential for asset sales to provide incremental liquidity
Honeywell acquired Clarke through its purchase of Novar plc ("Novar")
in March 2005, at which time Honeywell identified Clarke as a non-core
asset to be sold. M&F's acquisition of Clarke will include
the assumption of guarantees of certain derivative contracts relating
to Novar's Indalex aluminum business, which Honeywell is also
in the process of disposing. As part of the merger agreement,
Honeywell will indemnify Clarke, M&F and other related parties
for any potential liability arising from the guarantees. The merger
agreement provides that such guarantees will be either supported by a
letter of credit and/or transferred to a non-acquired entity.
If the guarantees are not transferred to a non-acquired entity,
the indemnification will be supported by a letter of credit for up to
$60 million, which M&F believes should cover any potential
liability on the guarantees. Payment on the guarantee, if
requested by the counterparty, will be made directly by Honeywell
or by drawing on the letter of credit. Moody's believes the
indemnity and letter of credit reduce the likelihood that Clarke will
be responsible for performance of the guarantees. M&F will
complete the transaction by acquiring Novar USA, Inc.,
which is Honeywell's subsidiary containing the operations of what will
be Clarke (currently housed in Novar USA, Inc.'s subsidiary
Security Printing, Inc.) and the guarantees discussed above.
Moody's ratings considered the audit for Security Printing, Inc.
and are subject to a review of the audit for Novar USA, Inc.
Ronald Perelman controls an investment company that holds 38% of
the common stock of publicly-traded M&F. M&F will
fund the $203 million equity portion of the $800 million
purchase price for Clarke from cash on hand ($94 million at September
30, 2005) and through a dividend from its indirect wholly-owned
subsidiary Mafco Worldwide Corporation ("Mafco"). Moody's
ratings assume that this contribution to Clarke will be made in non-redeemable
common stock as currently envisioned. Mafco will finance the dividend
with borrowings under a new credit facility. Clarke is significantly
larger than Mafco and will be M&F's largest operating subsidiary.
Because the debt of Clarke and Mafco will not contain cross guarantee,
cross collateralization or cross default provision, Moody's
ratings for Clarke do not incorporate Mafco's operations or debt.
The credit agreement and indenture will include restrictions on Clarke's
ability to pay dividends, repurchase shares, issue additional
debt and transact with affiliates. Moody's ratings are subject
to review of final terms and conditions of the credit agreement and indenture.
The stable ratings outlook anticipates that Clarke will continue to develop
products and services that moderate its vulnerability to declines in printed
check volumes and prices. Moody's also expects that Clarke
will utilize cash flow to pay down debt and will not engage in transactions
that increase leverage at Clarke or its immediate parent holding company.
The ratings or outlook could be lowered if deterioration in check industry
price or volume conditions, loss of market share or debt-financed
transaction raises Clarke's debt-to-EBITDA sustainably
Debt reduction through free cash flow or an equity offering that lowers
debt-to-EBITDA to 4.0x along with stable revenue
and operating margin trends could result in a favorable change in Clarke's
rating or outlook.
The senior secured credit facilities are guaranteed on a senior secured
basis by all of the borrower's domestic subsidiaries and Clarke's
direct parent, CA Acquisition Holdings, Inc. ("CAH"),
which is a wholly-owned subsidiary of M&F. The facilities
are not guaranteed by M&F. Collateral consists of a first priority
lien on substantially all tangible and intangible assets of the borrowers
and guarantors. The capital stock of the borrower and domestic
subsidiaries as well as 66% of the stock of any future first tier
foreign subsidiaries is also included in the security package.
The blanket guarantee and collateral structure provides senior secured
creditors with the first claim on the cash flow and assets in a distress
scenario. The senior secured facilities constitute over 70%
of outstanding debt and, accordingly, are rated at the B1
corporate family rating. Term loan amortization and the 75%
excess cash flow sweep provide greater assurance that the bulk of the
company's cash flow will be used to reduce debt. Financial
covenants will include maximum senior consolidated leverage, maximum
total consolidated leverage and minimum consolidated interest coverage
ratios that provide senior creditors negotiating leverage should the company's
credit metrics fall short of expectations.
The notes are Clarke's senior unsecured obligations and are supported
by senior unsecured guarantees from all direct and indirect operating
subsidiaries. The notes will not be guaranteed by CAH or M&F.
Only the bank credit facility will restrict CAH's business activities
including the ability to issue debt. The company has indicated
no current plans to issue debt at CAH and an offering at that level could
adversely affect ratings. The B2 rating on the notes are one notch
below the corporate family rating reflecting the effective subordination
to a material amount of secured debt.
Clarke, headquartered in San Antonio, TX, is a provider
of check and check-related products and services and of direct
marketing services to financial institutions, businesses and consumers
in the United States. Annual revenues approximate $610 million.
John E. Puchalla
Corporate Finance Group
Moody's Investors Service
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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