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Global Credit Research - 13 Jan 2011
Approximately $260 million of debt affected
New York, January 13, 2011 -- Moody's Investors Service assigned a Ba3 rating to Valassis Communications,
Inc.'s (Valassis) proposed $260 million senior unsecured
notes due 2019. Valassis intends to utilize the proceeds to redeem
the remaining $242.2 million of outstanding 8.25%
senior unsecured notes due 2015 and pay related fees and expenses.
Valassis' Ba2 Corporate Family Rating (CFR) and stable rating outlook
are not affected.
..Issuer: Valassis Communications, Inc.
....Senior Unsecured Regular Bond/Debenture
due 2019, Assigned a Ba3, LGD5 - 80%
The offering favorably extends the company's maturity profile and
is expected to lower cash interest expense modestly. Because the
company is roughly at its 3.0x net debt-to-EBITDA
leverage target (GAAP basis excluding Moody's standard adjustments),
Moody's expects Valassis will utilize its free cash flow for acquisitions
and shareholder distributions without materially increasing debt.
The proposed increase in debt and unsecured bonds is relatively modest
in relation to the $708 million of outstanding debt. Accordingly,
the offering does not affect the CFR or the instrument ratings.
The rating on the existing 2015 notes will be withdrawn when the notes
The proposed notes are guaranteed on a senior unsecured basis by the company's
material domestic subsidiaries and will be effectively subordinated to
the approximate $466 million of secured debt. The covenant
package provides more flexibility for shareholder distributions,
acquisitions and debt issuance. Moody's estimates Valassis
could incur in excess of $1.8 billion of debt under the
proposed 2.0x fixed charge incurrence test. This is considerably
more than approximate $870 million of debt that could be issued
under the existing 5.0x debt-to-cash flow incurrence
test, although debt issuance is also constrained by the credit facility
financial maintenance covenants.
Moody's believes the company has an incentive to maintain a conservative
leverage profile as unlimited restricted payments are permitted if the
pro forma net debt-to-cash flow ratio is below 3.0x.
Otherwise, the variable restricted payments basket (50% of
net income) is applicable and it is more limiting than the existing EBITDA
less 1.4x interest expense RP basket. Moody's estimates
the approximate $100 million variable restricted payments basket
that would have accrued from 2007 through 2010's third quarter under
the proposed indenture would be significantly lower than the approximate
$500 million basket accrued under the existing indenture.
The permitted investment basket (greater of $90 million or 5%
assets) is also slightly larger than the existing $75 million basket.
Valassis' Ba2 Corporate Family Rating (CFR) reflects the cash flow generated
from good market positions in a broad array of largely print-based
marketing services, and its moderate 2.7x debt-to-EBITDA
leverage (LTM 9/30/10 incorporating Moody's standard adjustments).
Valassis has considerable scale and reach in its business lines (99%
of total U.S. households) and good customer diversity.
The company nevertheless faces challenges from pricing pressure on print-based
media and long-term shifts of marketing services to digital/electronic
channels. Client spending is cyclical, but Moody's believes
the consumer value-oriented nature of the product offerings (such
as promotions and coupons) perform better than the overall advertising
marketing during advertising downturns due to shifts in client marketing
Valassis has a good liquidity position, although the March 2012
expiration of the $50 million revolver (undrawn except for $9.9
million of letters of credit) is a weakness. However, the
company has approximately $208 million of cash and free cash flow
is projected to meaningfully exceed the approximate $7 million
of required annual term loan amortization. Moody's also anticipates
in the rating that the company will be able to obtain a new revolver at
The stable rating outlook reflects Moody's expectation that Valassis
will maintain a good liquidity position, generate modest EBITDA
growth, utilize the bulk of its free cash flow for acquisitions
and share repurchases, and keep debt-to-EBITDA leverage
in a 3x range or lower over the next 12-18 months.
The rating could be downgraded if acquisitions, shareholder distributions
or a sustained drop in earnings would be expected to maintain debt-to-EBITDA
leverage above a mid 3x range or free cash flow-to-debt
below 10%. A deterioration in liquidity including expected
difficulty in meeting its remaining 2014 debt maturities could also lead
to a downgrade.
An upgrade is unlikely at this time given the potential for event risks
if demand for the company's print-based marketing products begins
to erode, but material debt reduction and/or a sustained improvement
in earnings and cash flow that leads to debt-to-EBITDA maintained
consistently below 2.25x and free cash flow-to-debt
above 15% could result in an upgrade.
Moody's last rating action on Valassis was on June 11, 2010 when
the company's CFR and Probability of Default Rating were upgraded to Ba2
from Ba3 and the senior unsecured notes were upgraded to Ba3 from B1.
Moody's subscribers can find further details on Valassis' 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.
Valassis' 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 Valassis' core industry and Valassis' ratings are believed to be comparable
to those of other issuers of similar credit risk.
Valassis, headquartered in Livonia, MI, offers a wide
range of promotional and advertising products including shared (direct)
mail (about 56% of LTM 9/30/10 revenue), free-standing
inserts (16%), neighborhood targeting (20%),
sampling, coupon clearing and consulting and analytic services.
Revenue for the LTM ended 9/30/10 was approximately $2.3
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of assigning
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.
John E. Puchalla
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's assigns Ba3 rating to Valassis' proposed senior notes
250 Greenwich Street
New York, NY 10007
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