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Rating Action:

Moody's assigns B1 rating to Harland Clarke's proposed term loan; the rating on senior secured note is unchanged at B1 following $500 million add on

20 Oct 2017

New York, October 20, 2017 -- Moody's Investors Service (Moody's) assigned a B1 rating to Harland Clarke Holdings Corp.'s (Harland Clarke) proposed $1,680 million term loan term due 2023. The B1 rating on the senior secured notes due 2022 are unchanged following the proposed $500 million add on. Harland Clarke's B2 Corporate Family Rating (CFR) and stable outlook are also unchanged.

The proceeds of the new term loan and $500 million add on to the senior secured note due 2022 are expected to refinance the existing term loan B-5 and B-6, repay $60 million outstanding on the ABL revolver, pay transaction related fees and add a modest amount of cash to the balance sheet. The transaction further extends out its debt maturity schedule although, the new term loan and senior secured note will have a springing maturity date of November 30, 2020, if the 9.25% senior unsecured notes due 2021 are still outstanding at that time. The ratings on the existing term loan B-5 and B-6 will be withdrawn after repayment.

Moody's adjusted leverage pro-forma for the transaction is unchanged at 5.1x as of Q2 2017 as debt increases only slightly. The new term loan is expected to have an annual amortization payment of $75 million if first lien leverage is less than 3x and $100 million if secured leverage is greater than 3x. We expect annual amortization payments of $100 million in the near term which is down slightly from over $100 million expected previously. We had also forecast the ABL revolver to be repaid with free cash flow so the amount of debt repayment projected over the next year has been reduced from over $160 million to $100 million pro-forma for the transaction.

The following is a summary of today's actions:

Issuer: Harland Clarke Holdings Corp.

Proposed $1,680 million term loan due 2023, assigned a B1 (LGD3)

Corporate Family Rating, unchanged at B2

Probability of Default Rating, unchanged at B2-PD

Existing senior secured note due August 2022, unchanged at B1 (LGD3)

Outlook Rating, remains at Stable

RATINGS RATIONALE

Harland Clarke's B2 corporate family rating (CFR) reflects our ongoing concern that the business model is subject to secular decline in both its check printing and Valassis' print based advertising model. While the decline in checks has moderated, we expect the business to remain in secular decline due to new and evolving payment alternatives. The Valassis division faces pressure from the secular demand shift of advertisers' marketing spend and distribution to Internet-based / digital media channels, as well as the ensuing pricing pressure on traditional print-based media. We anticipate secular pressures to be moderate in the near term as there will be demand for the company's products for an extended period of time, but pressure has the potential to increase over time. The acquisition of RetailMeNot, Inc. expands its digital presence, but we expect the digital savings space to be competitive and the company will have to continue to contend with traffic moving to mobile from desktop. The MaxPoint Interactive, Inc. acquisition is smaller in size, but is expected to improve the digital marketing capabilities and data analytics of the Valassis business and expand its customer base. The Scantron division, which is the smallest division, is also expected to remain under pressure due to the maturity of its form products. The ratings reflect the company's leverage of 5.1x as of Q2 2017 pro forma the transaction and recent acquisitions as well as Moody's standard adjustments. The history of sponsor friendly and related party transactions is also reflected in the rating. Refinancing activity extended the debt maturity profile so that the nearest debt maturity is in 2020.

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 if check volume declines should accelerate in the future. The acquisition of Valassis has enabled Harland Clarke to diversify its business lines and expand its customer base for which Valassis provides advertising and media delivery campaigns via its Shared Mail, Freestanding Inserts, and its Digital Media businesses. Moody's considers client spend to be cyclical, but the consumer value-oriented nature of the product offerings (including promotions and coupons) somewhat dampens the cyclicality since advertisers often reallocate marketing budgets to this type of advertising during economic downturns. Harland Clarke has achieved meaningful operational cost synergies and we anticipate additional costs savings to be realized going forward. The ratings are also supported by the company's good cash flow generation from its portfolio of businesses and EBITDA margins of 19% (as calculated by Moody's).

Harland Clarke is expected to have good liquidity due to good free cash flow and a cash balance of approximately $136 million pro-forma for the transaction. The company also has a $250 million asset backed revolver which is expected to be undrawn at closing after the $60 million balance is repaid. EBITDA to Interest coverage ratios are expected to be approximately 2.6x going forward. The term loans are covenant lite. The next debt maturity will be $275 million of senior secured notes due March 2020 and the rest of the secured debt will have a springing maturity to November 30, 2020 if the 9.25% senior unsecured notes ($709 million) are outstanding at that time.

The stable outlook reflects our expectation that Harland Clarke will continue to generate good cash flow over the next 12 -18 months and seek to reinvest cash through acquisitions and investments. We project total leverage will decline slightly to the 5x range over the next twelve months.

Ratings could be upgraded if the company demonstrates stable organic revenue and EBITDA trends and debt-to-EBITDA leverage declines below 4x on a sustained basis with no near term debt maturities. Confidence that the company would maintain financial policies that keep leverage below 4x on an ongoing basis would also be required.

A downgrade could occur if results suffer from accelerated deterioration in price or volume in its check business, demand and/ or pricing for Valassis' print-based marketing products erode at a faster-than-expected pace, a loss of market share, debt funded acquisitions, or distributions to the parent company that result in debt-to-EBITDA increasing above 5.5x. Elevated concern about the ability to refinance debt maturities in future periods could lead to negative rating pressure. A deterioration in its liquidity position could also lead to a downgrade.

Harland Clarke Holdings Corp. ("Harland Clarke"), headquartered in San Antonio, TX, is a provider of 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 businesses, and through its Scantron division, data collection, testing products, scanning equipment and tracking services to educational, commercial, healthcare and government entities. Its Valassis division offers clients mass delivered and targeted programs to reach consumers primarily consisting of shared mail, newspaper and digital delivery in addition to coupon clearing and other marketing and analytical services. M&F Worldwide Corp. ("M&F") acquired check and related product provider Clarke American Corp. in December 2005 for $800 million and subsequently acquired the John H. Harland Company in May 2007 for $1.4 billion. M&F merged the two companies to form Harland Clarke. M&F's remaining publicly traded shares were acquired by portfolio company, MacAndrews & Forbes Holdings, Inc. ("MacAndrews") on December 21, 2011. MacAndrews is wholly owned by Ronald O. Perelman. Harland Clarke acquired Valassis Communications, Inc. ("Valassis") on February 4, 2014 and RetailMeNot, Inc. on May 23, 2017. Reported revenue for the last twelve months ending Q2 2017 was $3.5 billion.

The principal methodology used in this rating was Media Industry published in June 2017. Please see the Rating 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

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
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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