Outlook is positive with approximately $748 million of debt affected
New York, March 04, 2011 -- Moody's Investors Service assigned a Ba2 rating to Deluxe Corporation's
(Deluxe) proposed $200 million senior unsecured notes, which
benefit from a pari passu guaranty from the company's material subsidiaries.
Net proceeds from the new notes will be used to tender the company's
existing 5% senior unsecured notes due 2012 which carry no subsidiary
guaranty. Deluxe's Corporate Family Rating (CFR) and Probability
of Default Rating (PDR) remain unchanged, each at Ba2.
The transaction improves the company's liquidity and financial flexibility
by extending its debt maturity profile and allowing Deluxe to build up
cash balances which may be used to fund tuck-in acquisitions or
investments in organic growth. The refinancing of non-guaranteed
debt with guaranteed notes reduces the cushion provided by lower priority,
non-guaranteed instruments and shifts the majority of the debt
composition to guaranteed instruments rated Ba2, in line with the
CFR. Accordingly, the senior unsecured notes due 2015 were
downgraded to Ba2 from Ba1. Also as a result of the change in capital
mix, the non-guaranteed 2014 notes and any untendered 2012
notes are notched lower, resulting in the downgrade to B1 from Ba3.
Deluxe has tendered for all of the approximately $280 million of
senior unsecured notes due 2012; to the extent more than $200
million of the 2012 notes are tendered exhausting net proceeds from the
new note issuance, Deluxe expects to fund the shortfall with advances
from its unrated, $200 million revolver. The outlook
is revised to positive from stable.
The following is a summary of today's actions and Moody's ratings for
Deluxe:
Unchanged:
..Issuer: Deluxe Corporation
....Corporate Family Rating: Ba2,
No Change
....Probability of Default Rating: Ba2,
No Change
Assignment:
..Issuer: Deluxe Corporation
....$200 million senior unsecured notes,
Assigned Ba2, LGD3, 40%
Downgrades:
..Issuer: Deluxe Corporation
....7-3/8% senior unsecured
notes, due 2015, Downgraded to Ba2, LGD3, 40%
from Ba1, LGD2, 24%
....5% senior unsecured notes,
due 2012, Downgraded to B1, LGD5, 86% from Ba3,
LGD5, 73%
....5-1/8% senior unsecured
notes, due 2014, Downgraded to B1, LGD5, 86%
from Ba3, LGD5, 73%
Outlook Actions:
..Issuer: Deluxe Corporation
....Outlook, Changed to Positive from
Stable
RATINGS RATIONALE
Deluxe's Ba2 Corporate Family Rating reflects ongoing pressure on the
company's revenue base (consisting largely of printed products) and operating
margins, as well as execution risks associated with the company's
strategy to expand its small business services (SBS) segment. While
the company generates more than $110 million in free cash flows
annually, there are risks associated with how it utilizes this cash
as balances build up, albeit mitigated by the 3.5x net debt-to-EBITDA
limitation (as defined and allowed for sizable acquisitions) under the
credit agreement of the unrated revolver maturing 2013 (note that more
recent indentures also have a 101% change of control put).
Moody's anticipates that Deluxe is likely to continue investing
in organic growth and acquisitions as management executes its strategy
of transitioning to a broader business model of providing an array of
services to small businesses and financial institutions. Over the
long term, we believe that Deluxe should maintain a more conservative
leverage profile than comparably-rated issuers due to the declining
outlook for its core check businesses. Over the near term,
the improving economic environment and stable EBITDA margins, as
a result of the announced $65 million target for additional expense
reductions for 2011 on top of the recently completed $325 million
cost reduction program, mitigate some of the downward earnings pressure
from declining check usage. The rating reflects our expectation
that Deluxe will continue to maintain a good liquidity profile,
as demonstrated by the proposed refinancing of 2012 note maturities.
In addition, we anticipate the company will sustain debt-to-EBITDA
leverage below 2.5x (incorporating Moody's standard adjustments),
providing Deluxe with capacity to absorb a moderate earnings decline,
increases in investment, or other uses of free cash flow within
this leverage level.
The outlook was revised to positive from stable reflecting our expectations
that leverage will remain below 2.5x, liquidity will remain
strong and management will continue to apply excess cash to reduce debt
balances. The outlook also accommodates the expected ongoing 7-8%
decline in check volumes offset by the company's growing non-check
related businesses.
Given the positive outlook, we do not expect to downgrade ratings;
however, debt-to-EBITDA ratios exceeding 3.5x
or free cash flow-to-debt falling below 9% due to
earnings deterioration or a leveraging event would lead to a downgrade.
Consistent revenue growth, stable to higher EBITDA margins,
and debt reduction that leads to greater flexibility to absorb a significant
customer loss or industry downturn while sustaining debt-to-EBITDA
below 2.25x and free cash flow-to-debt in excess
of 13% could position the company for an upgrade.
For additional information on Deluxe's ratings, please see the credit
opinion on www.moodys.com.
Moody's last rating action for Deluxe was on March 29, 2010 when
Moody's modified Deluxe's instrument ratings to reflect the
change in guarantee support structure.
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.
Deluxe'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 Deluxe's core industry and Deluxe's ratings are believed to be comparable
to those of other issuers of similar credit risk.
Deluxe Corporation, headquartered in St. Paul, MN,
uses direct marketing, distributors and a North American sales force
to provide a wide range of customized products and services to its customers.
The company has been diversifying from its legacy printed-check
business into a growing suite of business services, including logo
design, payroll, web design and hosting, business networking
and other web-based services to help small business grow.
In the financial services industry, Deluxe sells check programs
and fraud prevention, customer loyalty and retention programs to
banks. Deluxe also sells personalized checks, accessories
and other services directly to consumers. Revenue for LTM December
2010 totaled $1.4 billion.
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, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Analytics 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
Carl Salas
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653
New York
Russell Solomon
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 Ba2 rating to Deluxe Corporation's new debt and lowers existing senior unsecured ratings
