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Rating Action:

Moody's assigns Ba3 rating to Valassis' proposed senior notes

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.

Assignments:

..Issuer: Valassis Communications, Inc.

....Senior Unsecured Regular Bond/Debenture due 2019, Assigned a Ba3, LGD5 - 80%

RATINGS RATIONALE

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 The rating on the existing 2015 notes will be withdrawn when the notes are redeemed.

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 budgets.

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 reasonable terms.

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 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 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.

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

Moody's assigns Ba3 rating to Valassis' proposed senior notes
No Related Data.
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