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Rating Action:

Moody's downgrades Harland Clarke's CFR to B3 from B2; outlook remains stable

23 May 2019

New York, May 23, 2019 -- Moody's Investors Service (Moody's) downgraded Harland Clarke Holdings Corp.'s (Harland Clarke) Corporate Family Rating (CFR) to B3 from B2. The senior secured term loan and senior secured notes were downgraded to B2 from B1 and the senior unsecured notes were downgraded to Caa2 from Caa1. The outlook remains stable.

The downgrade is due to declines in overall performance that led leverage to increase to 6.2x as of Q1 2019 from 5.5x at the end of 2017, the approaching maturity of its outstanding debt due to springing maturity provisions in its debt agreements, and negative free cash flow for the LTM ending Q1 2019. Moody's expects Harland Clarke will pursue additional cost savings to offset declines in results and the company will benefit from a recent reorganization of its sales force, but business conditions will remain challenging due to the secular pressures impacting the company.

The following is a summary of today's actions:

..Issuer: Harland Clarke Holdings Corp.

.... Corporate Family Rating, Downgraded to B3 from B2

.... Probability of Default Rating, Downgraded to B3-PD from B2-PD

....Senior Secured Term Loan, Downgraded to B2 (LGD3) from B1 (LGD3)

....Senior Secured Regular Bond/Debenture, Downgraded to B2 (LGD3) from B1 (LGD3)

....Senior Unsecured Regular Bond/Debenture, Downgraded to Caa2 (LGD6) from Caa1 (LGD6)

Outlook Actions:

..Issuer: Harland Clarke Holdings Corp.

....Outlook, Remains Stable

RATINGS RATIONALE

Harland Clarke's B3 CFR reflects the increase in leverage to 6.2x as of Q1 2019 and Moody's ongoing concern that the business model is in secular decline in both its check printing and Valassis' print based advertising model. Check order volumes are in secular decline due to new and evolving electronic payment alternatives. The Valassis division faces pressure from the secular demand shift of advertisers' marketing spend to Internet-based / digital media channels, as well as the ensuing pricing pressure on traditional print-based media. The acquisition of RetailMeNot, Inc. has also underperformed Moody's expectations and the business is facing a competitive consumer savings environment as customer traffic shifts to mobile from desktop. The Scantron division, which is the smallest division, faces pressure due to the maturity of its form products.

Harland Clarke has a history of sponsor friendly and related party transactions that have continued even as the company has underperformed expectations. In prior periods, Harland Clarke achieved significant cost savings to support EBITDA and it will be important for the company to achieve additional cost savings to try to offset negative top line pressure on its business lines. Some of the company's secured debt is due in March 2020 and the rest of its senior secured debt has a springing maturity of November 2020 if the $709 million of senior unsecured debt is not refinanced prior to that date.

Harland Clarke's liquidity position is adequate, but has the potential to deteriorate due to the springing maturity date of its $250 million ABL revolving facility. The ABL facility matures in February 2022, but has a springing maturity date of November 2019 if the $275 million senior secured note is not refinanced by that date and another springing maturity date of November 2020 if the $709 million of senior unsecured notes is not repaid by that date. The facility had $65 million outstanding (with $13 million of L/C's outstanding) as of Q1 2019. Availability was $139 million as of Q1 2019 and free cash flow was negative in 2018 and the LTM period ending Q1 2019 due in part to above average tax payments made as part of its tax sharing agreement with its parent company. Capex is expected to be in the $70 to $80 million range in 2019. The term loan balance is projected to decline quarterly due to the above average amortization payments on the term loan of $100 million a year. The required amortization amount declines to $75 million a year if the secured leverage ratio is less than 3x which is not expected in the near term.

In addition to the ABL facility's springing maturity, the next scheduled debt maturity is the $275 million senior secured notes due March 2020. The term loan matures in November 2023, but has a springing maturity to November 2020 if the $709 million senior unsecured notes are still outstanding on that date. The $800 million senior secured notes are due in August 2022, but also have an accelerated maturity date of November 2020 if more than $50 million of senior unsecured notes are outstanding at that time. As a result, it will be important for the company to address both the $275 million of senior secured debt and the $709 million of senior unsecured debt prior to the springing maturity date becoming current in November 2019.

The stable outlook reflects Moody's expectation that the company will have modestly negative EBITDA performance in 2019 as the company attempts to reduce costs and improve sales performance following a change in its sales organization. Moody's projects free cash flow will improve as proceeds from its tax receivable balance with its parent company are received in 2019 and that its debt balance will decline due to $25 million of required quarterly amortization payments.

An additional downgrade could occur if the company is unable to address its debt maturities in the near term. Continuing declines in its check business, or further deterioration in demand for Valassis' print-based marketing products could also result in a downgrade if leverage increases above 7x or if the company's ability to service its debt obligations came into question. A decline in its liquidity position due to continued negative free cash flow or inability to access its ABL facility also has the potential to lead to negative rating pressure.

Ratings could be upgraded if the company demonstrates stable organic revenue and EBITDA trends and debt-to-EBITDA leverage decreases toward the mid 5x level on a sustained basis with no near term debt maturities. A positive free cash flow to debt ratio in the mid single digit percentage range would also be required.

The principal methodology used in these ratings was Media Industry published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Harland Clarke Holdings Corp. ("Harland Clarke"), headquartered in San Antonio, TX, is a provider of check and check related products, direct marketing services and customized business and home office products to financial services, retail and software providers as well as consumers and small businesses, and through its Scantron division, data collection, testing products, scanning equipment and tracking services to educational, commercial, healthcare and government entities. Its Valassis division offers clients mass delivered and targeted programs to reach consumers primarily consisting of shared mail, newspaper and digital delivery in addition to coupon clearing and other marketing and analytical services. The RetailMeNot division is an online and in-store consumer savings destination that connects consumers with retailers, restaurants, and brands as well as its operation of a discounted gift card marketplace.

M&F Worldwide Corp. ("M&F") acquired check and related product provider Clarke American Corp. in December 2005 for $800 million and subsequently acquired the John H. Harland Company in May 2007 for $1.4 billion. M&F merged the two companies to form Harland Clarke. M&F's remaining publicly traded shares were acquired by portfolio company, MacAndrews & Forbes Holdings, Inc. ("MacAndrews") on December 21, 2011. MacAndrews is wholly owned by Ronald O. Perelman. Harland Clarke acquired Valassis Communications, Inc. ("Valassis") in February 2014 and acquired RetailMeNot, Inc. in May 2017. Annual revenue was $3.4 billion as of Q1 2019.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Scott Van den Bosch
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Lenny J. Ajzenman
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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