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I AGREE
10 Apr 2013
Approximately $750 million of debt affected
New York, April 10, 2013 -- Moody's Investors Service ("Moody's") assigned a B1 rating to Harland
Clarke Holdings Corp.'s ("Harland Clarke") proposed $750
million new B3 term loan which extends the maturity of the remaining portion
of its 2014 term loan to May 2018. The B2 Corporate Family Rating
(CFR) is unchanged as is the Probability of Default Rating (PDR) of B2-PD.
Both the Extended term loan and the senior secured note ratings were unchanged
at B1 while the floating rate notes due 2015 ($204 million outstanding)
and 9.5% senior notes due 2015 ($271 million outstanding)
were also unchanged with a facility rating of Caa1. The outlook
remains Stable.
The new B3 term loan is expected to mature after the Extended term loan
which is due in June 2017, but before the Senior Secured notes which
are due in August 2018. Both term loans are expected to have a
springing maturity date if the notes that mature in May 2015 are not refinanced
90 days prior to maturity. The Extended and new B3 term loans are
anticipated to be covenant lite with similar credit terms, although
the new B3 term loan will have a 1% annual amortization payment
instead of the 10% amortization for the Extended term loan.
The proceeds of the new term loan will be used to refinance the $727
million Non-Extended term loan that matures in 2014 and pay fees
and expenses related to the transaction.
A summary of the company's ratings actions are listed below:
Issuer: Harland Clarke Holdings Corp.
.New B3 Term Loan due 2018, assigned B1 (LGD-3,
39%)
..Corporate Family Rating, unchanged at B2
..Probability of Default Rating, unchanged at B2-PD
..Extended Term Loan due 2017, unchanged at B1 (LGD-3,
39%)
..$235 million Senior Secured Note due 2018,
unchanged at B1 (LGD-3, 39%)
..Gtd. Floating Rate Senior Notes due 2015 ($207
million outstanding), unchanged at Caa1 (LGD-6, 90%)
..9.5% Gtd. Global Notes due 2015 ($271
million outstanding), unchanged at Caa1 (LGD-6, 90%)
..Non-Extended Term Loan due 2014, unchanged
at B1 (LGD-3, 39%) to be withdrawn upon closing of
the transaction
..Outlook, Remains Stable
The assigned ratings are subject to review of final documentation and
no material change in the terms and conditions of the transaction as provided
to Moody's.
RATINGS RATIONALE
Harland Clarke's B2 Corporate Family Rating reflects Moody's ongoing concern
that the secular decline in check writing will continue due to new and
evolving payment alternatives. The ratings also reflect the company's
relatively high leverage of 5.1x as of yearend 2012 (including
Moody's standard adjustments), weakness in its Scantron segment
due to the maturity of its form products and weak results from its GlobalScholar
and Spectrum K12 businesses, as well as the history of sponsor friendly
and related party transactions. Harland Clarke has a good track
record of mitigating volume declines with price increases and costs savings,
but we remain concerned these efforts will not be sufficient to prevent
top line erosion by reduced check-related revenues. The
company has made several acquisitions over the years to diversify away
from its core check printing business including the GlobalScholar and
Spectrum K12 acquisitions in 2011 and 2010 as well as the March 2012 acquisition
of New Faneuil, Inc that was owned by Ronald Perelman which also
owns parent company MacAndrews & Forbes Holdings Inc. The ratings
are supported by the company's good cash flow generation from its portfolio
of businesses, relatively high EBITDA margins, the strength
of its Harland Financial Solutions segment, and the 10% debt
amortization requirement on the Extended term loan that accelerates debt
repayment.
Harland Clarke is expected to have good liquidity as indicated by its
SGL-2 rating due to strong free cash flow, despite higher
interest expense from the transaction and required debt amortization payments
on the Extended term loan. The cash balance pro-forma for
the transaction is expected to be $82 million. In February
2013, Harland refinanced its revolving credit facility with a new
$80 million ABL facility (not rated) that matures in February 2018,
but has a springing maturity if the secured or unsecured debt that matures
ahead of it is not refinanced 91 days prior to maturity. The borrowing
base of the ABL facility, based on 2012 year end balances,
was $56.7 million. Harland has the ability to issue
an additional $250 million of incremental terms loans as part of
the credit agreement. $476 million in subordinate debt comes
due in May 2015.
The stable outlook reflects our expectation that Harland Clarke will continue
to generate good cash flow over the next 12 -18 months, seek
to reinvest cash through acquisitions and investments, and utilize
excess cash to fund required term loan amortization or potential modest
distributions to M&F. We also expect total leverage will remain
at approximately 5x in 2013 aided by required debt repayments.
Ratings are unlikely to be upgraded in the near term until organic revenue
and EBITDA trends turn positive on a consistent basis, the company
demonstrates further diversification away from its traditional check printing
business, and leverage declines below 4.25x on a sustained
basis with all near term maturities addressed.
Ratings could be lowered if results suffer from accelerated deterioration
in price or volume in its check business, a loss of market share,
acquisitions, or distributions to the parent company that result
in debt-to-EBITDA increasing above 5.75x.
Deterioration in liquidity could also lead to a downgrade.
The principal methodology used in this rating was Global Publishing Industry
published in December 2011. Other methodologies used include Loss
Given Default for Speculative-Grade Non-Financial Companies
in the U.S., Canada and EMEA published in June 2009.
Please see the Credit Policy page on www.moodys.com for
a copy of these methodologies.
Harland Clarke Holdings Corp. ("Harland Clarke"), headquartered
in San Antonio, TX, is a provider of (a) check and check-related
products, direct marketing services and customized business and
home office products to financial services, retail and software
providers as well as consumers and small business (69% of total
FY2012 revenue), (b) software and related services to financial
institutions (15% of total revenue) through its Harland Financial
Solutions segment, (c) data collection, testing products,
scanning equipment and tracking services to educational, commercial,
healthcare and government entities through its Scantron segment (7%
of total revenue), and (d) business process outsourcing including
call centers and toll service operations at its Faneuil division (9%).
M&F Worldwide Corp. ("M&F") acquired check and related
product provider Clarke American Corp. ("Clarke American") in December
2005 for $800 million and subsequently acquired the John H.
Harland Company ("Harland") in May 2007 for $1.4 billion.
M&F merged Clarke American and Harland to form Harland Clarke.
Annual revenues totaled $1.7 billion through December 2012.
M&F's remaining publicly traded shares were acquired by portfolio
company, MacAndrews & Forbes Holdings Inc on December 21,
2011.
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.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Scott Van den Bosch
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
Moody's assigns B1 rating to Harland Clarke's new Term Loan
No Related Data.
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