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Rating Action:

Moody's assigns B2 ratings to Sheridan Group's proposed credit facilities

23 Feb 2011

Approximately $160 million of debt affected

New York, February 23, 2011 -- Moody's Investors Service has assigned B2 ratings to The Sheridan Group, Inc.'s ("Sheridan" or the "Company") $160 million of proposed senior secured bank credit facilities including a $20 million revolving credit facility and a $140 million term loan facility. Concurrently, Moody's also affirmed Sheridan's B2 Corporate Family Rating ("CFR") and revised its Probability of Default rating to B3 from B2 (in accordance with Moody's Loss-given-Default methodology). Sheridan plans to use proceeds from its proposed term loan issuance, approximately $9 million of borrowings under its proposed revolver, and roughly $5 million of balance sheet cash to refinance existing indebtedness and pay associated fees and expenses. The B2 rating for Sheridan's 10.25% senior secured notes due August 2011 will be withdrawn upon full repayment of the notes at the close of the transaction. The outlook for the ratings is stable.

Moody's has taken the following rating actions:

Proposed $20 million Senior Secured Revolving Credit Facility due 2015 -- Assigned B2 (LGD3, 36%)

Proposed $140 million Senior Secured Term Loan Facility due 2016 -- Assigned B2 (LGD3, 36%)

Corporate Family Rating -- Affirmed at B2

Probability of Default Rating -- Lowered to B3 from B2

$143 million of 10.25% Sr. Secured Notes due August 2011 -- Affirmed, B2 (LGD4, 52%), to be subsequently withdrawn

Ratings are subject to the execution of the proposed transaction and Moody's review of final documentation.

RATINGS RATIONALE

The affirmation of Sheridan's Corporate Family Rating reflects Moody's view that the Company's moderate debt leverage (pro forma Moody's adjusted debt-to-EBITDA of approximately 4.0x) and modestly improved run-rate free cash flow generation prospects (benefiting from lower operating costs and interest expense on the proposed bank debt relative to the existing bonds) continue to support the B2-rating despite the continued challenging revenue environment. While Moody's expects Sheridan to benefit from improving macro conditions and less dramatic volume / pricing erosion over the near-term, we do not expect a material rebound in top line revenues to peak historic levels. However, we do anticipate that Sheridan's credit profile will benefit from cost synergies from production facility consolidation as well as the Company's prioritization of debt reduction, resulting in debt-to-EBITDA in the mid-3.0x-range by FYE2012.

Sheridan's B2 CFR is constrained by the Company's modest size / scale relative to larger, better capitalized printers, weak industry fundamentals characterized by continued declines in print volumes, general overcapacity and persistent pricing pressure, and the Company's intensely competitive operating environment. Additionally, Moody's believes that continued media fragmentation and ongoing transition from traditional print-media to electronic and web-enabled platforms will pressure overall print volumes for the industry and limit Sheridan's growth prospects. Conversely, the rating is supported by Sheridan's market position as a specialty printer serving niche / regional markets with high customer service needs, its diversified product mix coupled with high customer retention rates and the Company's ability to minimize EBITDA erosion through effective cost cutting to offset weak industry fundamentals and macro conditions over the recent period. Additionally, the rating is also supported by Sheridan's adequate liquidity position and moderate pro forma debt leverage (with expectations for steady deleveraging over time).

Based on the proposed transaction, Sheridan's debt structure will consist of first lien bank debt only, compared to the existing structure of both bank debt and bonds. As such, Moody's lowered Sheridan's probability of default rating to B3 from B2 and switched to a 65% family recovery rate from a 50% family recovery rate, as indicated by Moody's Loss Given Default Methodology. In Moody's opinion, companies with only first-lien bank debt have better recovery prospects but a higher probability of default than firms with mixed debt capital structures.

The stable outlook incorporates Moody's expectation that Sheridan will be able to stabilize recent revenue declines through new customer growth and realize cost savings from its facility consolidation and that debt leverage will remain below 4.0x debt-to-EBITDA. Additionally the stable outlook also assumes that Sheridan will maintain at least an adequate liquidity profile supported by modestly positive free cash flow in 2011 followed by more significant free cash flow in 2012.

Sheridan's rating or outlook could come under pressure if the Company experiences a material erosion in EBITDA levels as a result of protracted revenue declines and/or inability to effectively manage its cost structure such that debt-to-EBITDA approaches 4.5x and/or free cash flow generation falls to less than 5% of total debt. Additionally, overly shareholder-friendly fiscal policies that weaken the Company's credit profile could also result in negative rating actions. Absent an improvement in industry fundamentals and a material increase in Sheridan's overall size and scale, a ratings upgrade is highly unlikely over the next 12 to 18 months. Additionally, a ratings upgrade would require evidence of improvement in top line revenue trends combined with expectations for sustainable debt-to-EBITDA in the low 3.0x-range and sustainable positive free cash flow exceeding 10% debt.

Headquartered in Hunt Valley, Maryland , The Sheridan Group, Inc. is a provider of printing solutions to niche markets within specialty journal, catalog, magazine and book segments. Sheridan operates through three business segments -- Publications (56% of revenues), Catalogs (23% of revenues), and Books (21% of revenues). For the last twelve month period ended September 2010, the Company reported revenues of approximately $273 million.

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.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, parties not involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

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.

New York
Kyle Chen
Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's assigns B2 ratings to Sheridan Group's proposed credit facilities
No Related Data.
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