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Global Credit Research - 12 Nov 2010
$425 million of rated debt affected
New York, November 12, 2010 -- Moody's Investors Service upgraded the Corporate Family Rating ("CFR")
and Probability of Default Rating ("PDR") for Vertis Inc.
("Vertis"), each to B3 from Caa1. At the same
time, Moody's downgraded its rating for the proposed $425
million senior secured term loan (increased from $365 million),
to B3 from B2, largely reflecting the removal of meaningful debt
cushion that had previously been afforded (and as initially rated) by
$550 million of proposed second lien notes. The ratings
are assigned in connection with Vertis' latest proposed out-of-court
restructuring and refinancing that will reduce funded debt by approximately
60% to $472 million through conversion of existing senior
secured second lien notes and senior PIK notes into common stock.
Vertis plans to utilize net proceeds from the senior secured term loan
to repay existing bank debt facilities as well as to fund transaction
fees and related expenses. These actions conclude the review that
was initiated on September 3, 2010.
Over the past several months, Vertis had proposed alternative exchange
offers that would have reduced debt balances by less than what is currently
planned. We believe the proposal announced on November 2,
2010 is likely to be executed either (i) out-of-court as
proposed, or (ii) upon emergence from an in-court restructuring
under Chapter 11 Bankruptcy Court protection. The $600 million
of combined new debt facilities, which includes an unrated $175
million ABL revolver that notably retains a priority position on the firm's
current assets, along with a $100 million equity rights offering
as currently contemplated, are backstopped with a pre-packaged,
in-court plan that largely mirrors this out-of-court
restructuring, subject to board approval. As such,
Moody's contends that ratings, which are based on the revised pro
forma capital structure, will remain as stipulated herein irrespective
of the eventual form of restructuring that transpires.
The following summarizes Moody's ratings and today's rating actions for
...Issuer: Vertis, Inc.
...Corporate Family Rating, upgrade to B3 from
...Probability of Default Rating, upgrade to
B3 from Caa1
...Issuer: Vertis, Inc.
...Senior Secured First Lien Term Loan, downgrade
to B3 LGD4 - 55% from B2 LGD3-30%
...Issuer: Vertis, Inc.
...Speculative Grade Liquidity Rating, SGL-3
Vertis' B3 CFR reflects the company's moderately high pro forma financial
leverage, the continuing decline in demand for advertising inserts,
as well as long-term price and volume pressure on the print-based
advertising and direct marketing products and services that comprise the
majority of the company's revenue base. The proposed transactions
would be a second restructuring following its 2008 bankruptcy reorganization
and favorably extend the maturity profile, reduce total interest
expense, and result in pro forma debt-to-EBITDA leverage
of approximately 4.4x for FYE December 2010 (incorporating Moody's
standard adjustments and approximately $22 million of embedded
restructuring costs). Although modest, we expect free cash
flow to be positive over the next 18 months and liquidity to be adequate
with a minimum $55 million of revolver availability over the rating
horizon. Vertis' significant scale, broad geographic reach
within the U.S., and long-term customer relationships
provide a foundation from which the company could improve its credit profile.
Further, the company's efforts to adjust its cost structure and
exit unprofitable businesses, coupled with adequate near-term
liquidity, provide some flexibility to execute growth initiatives
and Vertis' consolidation strategy over the next 12 to 18 months.
Failure to execute on these fronts will limit Vertis' ability to reduce
The out-of-court restructuring/refinancing transactions
are subject to a number of conditions including minimum participation
requirements on the company's exchange offerings. Absent a successful
exchange offer, Vertis plans to file for Chapter 11 Bankruptcy Court
protection and would have access to debtor-in-possession
financing already committed to by its lead banks. Assuming no change
in the proposed terms of the restructuring when the company emerges from
Chapter 11 protection, we do not expect revisions to the B3 CFR,
B3 PDR or the B3, LGD 4-55% rating on the senior secured
term loan. Moody's assumes these conditions are met but ratings
are subject to a review of the final results of the company's restructuring
and the terms and conditions of the debt instruments.
The B3 rating and LGD4-55% assessment on the proposed $425
million first lien term loan matches the corporate family rating and takes
into consideration the new, unrated $175 million senior secured
ABL revolver, which notably enjoys a preferred collateral pool in
the form of more liquid current assets. We rank the new term loan
behind the new revolver given that the proposed term loan will have second
priority with respect to current assets and first priority only with respect
to all other assets. The term loan is guaranteed by the parent
holding company, Vertis Holdings, Inc., as well
as domestic subsidiaries.
The stable rating outlook reflects our expectation that consolidated revenues
will decline 4%-6% in the near term due largely to
lower sales in the advertising inserts segment. The outlook also
incorporates our view that Vertis will continue to control costs to maintain
operating margins and keep an adequate liquidity position for the next
12 months. We expect Vertis to maintain debt-to-EBITDA
ratios under 4.75x (including Moody's standard adjustments)
over the near-term, with free cash flow being applied to
reduce revolver outstandings. The liquidity position provides Vertis
near-term flexibility to execute its business plan and further
streamline costs and stabilize revenues through growth initiatives primarily
in the direct marketing segment.
An acceleration in the decline of advertising inserts business or the
inability to maintain EBITDA margins resulting in debt-to-EBITDA
leverage ratios exceeding 5.0x (including Moody's standard
adjustments) could lead to a downgrade. Deterioration in the company's
liquidity position or a decrease in the EBITDA cushion to financial maintenance
covenants could also lead to a downgrade. Ratings could be upgraded
if revenue growth exceeds expectations due to stable demand for advertising
inserts and/or better than expected sales growth for direct mail products,
and results in debt-to-EBITDA leverage ratios being sustained
below 3.5x while higher levels of free cash flow are generated.
Moody's subscribers can find further details on Vertis' ratings in the
credit opinion published on www.moodys.com.
Moody's last rating action for Vertis was on September 3, 2010 when
ratings were placed under review (direction uncertain) following the company's
announcement that it revised its restructuring proposal.
The principal methodology used in determining instrument ratings was Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Vertis' ratings were assigned by evaluating factors we believe are relevant
to the credit profile of the issuer, such as i) the business risk
and competitive position of the company versus others within its industry,
ii) the capital structure and financial risk of the company, iii)
the projected performance of the company over the near to intermediate
term, and iv) management's track record and tolerance for risk.
These attributes were compared against other issuers both within and outside
of Vertis' core industry and Vertis' ratings are believed to be comparable
to those of other issuers of similar credit risk.
Vertis Inc., headquartered in Baltimore, MD,
provides advertising, direct marketing and interactive products
and services to clients across North America. Vertis merged with
ACG in October 2008 upon the emergence of both companies from July 2008
pre-packaged bankruptcy filings. Given continued declines
in revenue since the end of 2008, particularly for advertising inserts,
the company has been challenged to reduce debt balances. On November
2, 2010, Vertis announced a proposed restructuring with a
pre-packaged Chapter 11 backstop. Through the 12 months
ended June 2010, revenue was approximately $1,265 million.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's Raises Vertis' CFR & PDR but Lowers Sr Sec Term Loan Rating to B3 from B2
250 Greenwich Street
New York, NY 10007
No Related Data.
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