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Rating Action:

Moody's assigns B3 rating to Catalina's proposed holdco notes

05 Nov 2010

Approximately $1.4 billion of debt instruments affected

New York, November 05, 2010 -- Moody's Investors Service assigned a B3 rating to Checkout Holding Corp.'s (Checkout) proposed $260 million senior unsecured discount notes due 2015. Checkout is the parent company of Catalina Marketing Corporation (Catalina). The company plans to utilize the net proceeds to fund a dividend to shareholders including equity sponsor Hellman & Friedman (H&F)and distributions to option holders. The increase in debt and leverage weakens the credit profile but can be accommodated within the B1 Corporate Family Rating (CFR) given Catalina's strong operating performance that previously reduced leverage to the low end of the range anticipated for the rating. The B1 CFR and B1 Probability of Default Rating (PDR) remain unchanged and will be moved to Checkout as it is now the highest level debt issuer within the legal entity structure. The rating outlook remains stable.

Following a summary of today's rating action:

Assignments:

..Issuer: Checkout Holding Corp.

....Corporate Family Rating, Assigned B1

....Probability of Default Rating, Assigned B1

....Senior Unsecured Regular Bond/Debenture, Assigned a B3, LGD6 - 92%

Upgrades:

..Issuer: Catalina Marketing Corporation

....Senior Unsecured Regular Bond/Debenture, Upgraded to B2, LGD4 - 62% from B3, LGD5 - 77%

LGD Updates:

..Issuer: Catalina Marketing Corporation

....Senior Secured Bank Credit Facility, Changed to LGD2 - 20% from LGD2 - 27% (no change to Ba2 rating)

....Subordinate Regular Bond/Debenture, Changed to LGD5 - 82% from LGD6 - 93% (no change to B3 rating)

Withdrawals:

..Issuer: Catalina Marketing Corporation

....Corporate Family Rating, Withdrawn, previously rated B1

....Probability of Default Rating, Withdrawn, previously rated B1

Outlook Actions:

..Issuer: Checkout Holding Corp.

.....Assigned, Stable

RATINGS RATIONALE:

Checkout's B1 Corporate Family Rating (CFR) reflects its leading market position in POS marketing services, strong operating margins and favorable intermediate-term growth opportunities, which supports good cash flow generation. Catalina's exposure to cyclical advertising spending, modest size, high leverage following the 2007 LBO and November 2010 dividend, and event risks related to equity sponsor ownership mitigate these strengths and weakly positions the company within the B1 CFR category. Catalina has refinancing risk due to significant debt maturities in 2014 and 2015, but its liquidity for the next few years is good based on a sizable cash balance relative to near-term maturities, its good cash flow generation, and the absence of financial maintenance covenants in the credit agreement.

The proposed dividend is significant and represents a return of more than half of H&F's original $506 million investment in the company. The B1 CFR remains unchanged despite the substantial dividend on the strength of Catalina's track record of reinvestment that drives a growing revenue and earnings base. Catalina continues to increase the number of retailers participating in its point-of-sale (POS) coupon network (including Target in 2009/2010) and expand the range of products (such as health and beauty) for which promotions are offered. These factors along with Catalina's ability to analyze purchase history to target promotions based on buying behavior is driving good earnings growth.

The proposed notes are PIK interest-only instruments that will add to the company's debt balance and put upward pressure on leverage unless EBITDA continues to grow. Moody's anticipates debt-to-EBITDA leverage (approximately 5.5x LTM 6/30/10 pro forma for the note offering and incorporating Moody's standard adjustments) will decline to a 5.2-5.4x range in 2011 as projected EBITDA increases and modest debt reduction are largely offset by the PIK interest and the use of free cash flow for investments/acquisitions, subject to restrictions in the debt agreements. The notes will marginally enhance cash flow prior to the maturity as the company intends to deduct the interest for tax purposes (the five-year maturity also avoids the note from being considered an AHYDO instrument).

The 2015 maturity of Checkout's proposed notes adds to the company's 2014-2015 refinancing risk and is also inside the 2017 maturity of Catalina's $160 million senior subordinated notes. Moody's does not believe Catalina would have sufficient restricted payments capacity within the subordinated note indenture to fund the maturity of Checkout's notes. However, the company has the ability to call the proposed notes at a 2-4% premium to par value prior to maturity (as opposed to a potentially more costly make-whole premium). Moody's believes this in conjunction with Catalina's need to address an approximate $600 million term loan maturity in 2014 and $330 million senior unsecured note maturity in 2015 suggests the company will seek to refinance the entire capital structure by 2013 or 2014, possibly in conjunction with an H&F exit transaction.

Checkout is a holding company with no operations and is reliant on cash flow from Catalina to service the new notes, which because of the absence of guarantees are structurally subordinated to Catalina's debt. The terms of Catalina's $330 million senior unsecured notes remain unchanged. The instrument rating is nevertheless upgraded to B2 from B3, consistent with Moody's Loss Given Default Methodology, reflecting the increased proportion of subordinated debt in the company's capital structure following completion of the proposed transaction. Catalina's Ba2 senior secured credit facility rating and B3 senior subordinated note rate are unchanged. Loss given default assessments were updated to reflect the revised capital structure.

The stable rating outlook reflects Moody's expectation that Catalina will continue to grow revenue and EBITDA modestly, reinvest through retail store expansion, and maintain a good liquidity profile to manage in the sluggish economic environment. Moody's anticipates debt-to-EBITDA will decline moderately and believes free cash flow generation enhances the company's ability to address its 2014-2015 maturities.

The ratings could be downgraded if the loss of a significant customer or retailer from the network, shift in consumer purchases to non-network retailers or digital channels, acquisitions/investments or cash distributions to shareholders causes debt-to-EBITDA to increase and be sustained above 5.75x. A weakening of liquidity including concern that the company could have difficulty addressing its 2014-2015 maturities would also create downward rating pressure.

The likelihood of an upgrade is low given event risks related to the private equity sponsor ownership. Profitable expansion of the retail network, good underlying coupon print volume growth and stable to higher margins, along with debt reduction from cash flow, asset sales or equity offering proceeds leading to debt-to-EBITDA sustained below 4.5x and free cash flow-to-debt sustained above 7% could result in an upgrade. Catalina would also need to maintain a good liquidity position and Moody's would need to get comfortable that a leveraging transaction would not impede the company's ability to sustain these stronger credit metrics in order to be considered for an upgrade.

The last rating action was on December 23, 2009 when Moody's upgraded Catalina's CFR and PDR to B1 from B2 and raised the instrument ratings by one notch.

Moody's subscribers can find further details on Catalina's ratings in the credit opinion published on www.moodys.com.

The principal methodology used in this rating was Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009.

Catalina's 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 Catalina's core industry and Catalina's ratings are believed to be comparable to those of other issuers of similar credit risk.

Catalina, headquartered in St. Petersburg, FL, is the leader in point-of-sale (POS) promotional marketing services. H&F acquired Catalina in a 2007 leveraged buyout. Revenue for the LTM period ended 6/30/10 was approximately $635 million.

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
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Neil Begley
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's Investors Service
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New York, NY 10007
U.S.A.

Moody's assigns B3 rating to Catalina's proposed holdco notes
No Related Data.
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