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Rating Action:

Moody's Downgrades RR Donnelley & Sons Company's CFR to Ba3; developing outlook

02 Feb 2016

Approximately $4.9 billion of rated debt instruments and commitments affected

Toronto, February 02, 2016 -- Moody's Investors Service (Moody's) downgraded RR Donnelley & Sons Company's (RR Donnelley) ratings to Ba3 from Ba2 and changed the company's ratings outlook to developing. As part of the same rating action, Moody's downgraded RR Donnelley's senior secured bank credit facility rating to Baa3 from Baa2, and senior unsecured notes' rating to B1 from Ba3 and also affirmed the company's SGL-3 speculative grade liquidity rating (indicating good liquidity).

The rating downgrade was prompted by Moody's anticipation that RR Donnelley's future pace of de-levering will continue to slow as top-line and margin pressures persist. The proportion of RR Donnelley's EBITDA that is converted into Free Cash Flow has been declining and Free Cash Flow as a proportion of outstanding debt has been gradually decreasing, and Moody's expects both trends to continue, even after the company absorbs what appears to be a one-time appreciation of the US dollar. Moody's expects revenue and EBITDA to be flat to modestly negative because of the print industry's continuing secular decline, permanently impairing the company's de-levering capabilities.

However, despite leverage of Debt/EBITDA likely remaining in the 3.5x-to-4.0x range, a level that Moody's considers to be aggressive given the company's business risk, the rating continues to benefit from RR Donnelley's significant scale, breadth of product offering, and track record of generating free cash flow. Owing to the company's plans to split into the three separate entities, and with the relative trade-offs amongst rating factors and, therefore, ratings strengths and weaknesses, likely to be affected, the ratings outlook is developing to indicate that further ratings adjustments may occur as the spin transactions unfold.

RR Donnelley's SGL-3 liquidity rating is based on its large revolving credit facility and Moody's expectation that the company will be free cash flow positive. While, owing to seasonality and the timing of its term debt maturities, the company's accumulated free cash flow may not fully repay its next two maturities exactly at their respective maturity dates ($219 million in August, 2016 and $251 million in January, 2017), the company's $1.5 billion revolving credit facility supplements funding and allows term debt repayment. After each term debt maturity, RR Donnelley's free cash flow (estimated at about $150 million to $250 million per year) repays the outstanding credit facility amounts over time.

..Issuer: R.R. Donnelley & Sons Company

The following ratings have been Downgraded:

.... Probability of Default Rating, to Ba3-PD from Ba2-PD

.... Corporate Family Rating, to Ba3 from Ba2

....Senior Secured Bank Credit Facility, to Baa3 (LGD2) from Baa2 (LGD1)

....Senior Unsecured Regular Bond/Debenture, to B1 (LGD5) from Ba3 (LGD4)

The following rating has been Affirmed:

.... Speculative Grade Liquidity Rating, SGL-3

....Outlook, Changed To Developing From Rating Under Review

RATINGS RATIONALE

RR Donnelley's Ba3 CFR is driven primarily by Moody's expectations that leverage of Debt-to-EBITDA will be 3.5x to 4.0x over the next two years, a level that is high given the company's elevated business risk profile, a consequence of exposure to the commercial printing industry, which is in secular decline. However, the leverage level is acceptable given downside protection based on the company's significant scale, breadth and scope of its business lines, variable cost structure and free cash flow profile.

Rating Outlook

The outlook is Developing because management's plan to split the company into three separate entities later in 2016 may have incremental ratings' implications.

What Could Change the Rating - Up

The rating could be upgraded if we expected:

• Sustained Debt-to-EBITDA leverage below 3.0x (4.0x at 30Sep15), and

• Sustained Free Cash Flow-to-Debt above 5% (5.7% at 30Sep15), and

• Stronger industry fundamentals, and

• Solid liquidity arrangements

What Could Change the Rating - Down

The rating could be downgraded if we expected:

• Sustained Debt-to-EBITDA leverage at or above 4.0x (4.0x at 30Sep15), or

• Sustained Free Cash Flow-to-Debt significantly below 5% (5.7% at 30Sep15), or

• Further deterioration in organic growth prospects or EBITDA margins, or

• Significantly weaker liquidity arrangements

The principal methodology used in these ratings was Global Publishing Industry published in December 2011. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

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Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bill Wolfe
Senior Vice President
Corporate Finance Group
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
(416) 214-1635

Releasing Office:
Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's Downgrades RR Donnelley & Sons Company's CFR to Ba3; developing outlook
No Related Data.
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