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Rating Action:

Moody's lowers Checkout CFR to B3, assigns ratings to debt proposed to fund buyout

Global Credit Research - 18 Mar 2014

New York, March 18, 2014 -- Moody's Investors Service lowered the Corporate Family Rating (CFR) of Checkout Holding Corporation (Checkout, a parent company of Catalina Marketing Corporation, or Catalina) to B3 from B2 based on the proposed leveraged buyout of a majority stake in Catalina by Berkshire Partners LLC (Berkshire).

Berkshire and affiliates are investing cash equity, which, combined with rollover equity from Hellman & Friedman LLC (H&F) for a total equity value of $840 million, and $1.7 billion of new debt will fund the acquisition of majority control of the company from H&F and repay all existing debt. H&F remains a significant investor.

The rating outlook is stable, and Moody's assigned ratings to instruments as shown below. In conjunction with the buyout, Moody's expects PDM Intermediate Holdings B Corp (HoldCo or PDM), an entity created to execute the transaction, to issue Unsecured PIK Toggle Notes. Moody's does not rate this debt but does include it when calculating credit metrics based on the likelihood that Catalina will fund any cash interest payments on the notes and ultimately be the source for refinancing of these notes. Assuming close of the transaction as proposed, Moody's expect to withdraw ratings on existing Checkout and Catalina debt. Checkout Holding Corporation is the borrower for the proposed first and second lien credit facilities and a parent company of Catalina Marketing.

Checkout Holding Corp. (NEW)

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

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

....Senior Secured Fist Lien Credit Facility, Assigned B1, LGD2, 28%

....Senior Secured Second Lien Credit Facility, Assigned Caa1, LGD5, 77%

....Outlook, Stable

RATINGS RATIONALE

Pro forma for the transaction, Moody's estimates Checkout's leverage at approximately 7.8 times debt-to-EBITDA, and this high leverage drives the B3 CFR. Furthermore, PIK accretion on the HoldCo bonds, which represent about 13% of total debt and 1 turn of leverage, raises the hurdle for growth or debt repayment to reduce leverage. Despite the heavy debt load, Moody's expects the strong EBITDA margin and non-cash interest on the HoldCo bonds (mandatory PIK for the first two years, cash or PIK thereafter at the company's option) to facilitate positive free cash flow, which, together with expectations for an undrawn $100 million revolver with no financial maintenance covenants unless drawn, supports liquidity and minimizes default risk.

Catalina's leading position in Point of Sale marketing services, the breadth of its retail base, its data on purchasing history that allows for personalized promotions, and its long term relationships with both retailers and core consumer packaged goods (CPG) manufacturers position it well to manage the evolving landscape and expand its digital presence. Nevertheless, competition from digital and mobile marketing service providers and changing consumer behavior elevate business risk as the company's CPG clients diversify their marketing budgets away from traditional print based promotions to brand building and experiment with other means of reaching consumers that technology advances are enabling. The EBITDA margin eroded as the company invested to adapt, but Moody's expects it to stabilize around current still healthy levels, and the strong EBITDA margin together with the low default risk provide flexibility for investment in new business development. Continued international expansion of Checkout's retail base provides good growth prospects, which partially mitigates significant revenue concentration. However, Moody's believes the company's small size leads to potential volatility in cash flow from a shift in customer spend and also leaves it vulnerable to potential market disruption should larger companies seek a more significant presence in the digital and mobile couponing market.

The stable outlook assumes Checkout will generate positive free cash flow and reduce leverage through EBITDA growth and some repayment of its first lien term loan.

Moody's would consider an upgrade with expectations for gross leverage to trend below 6 times debt-to-EBITDA and evidence of traction with its digital initiatives. An upgrade would also required maintenance of good liquidity, including expectations for positive free cash flow.

Moody's would consider a downgrade based on lack of progress in reducing leverage or a deterioration of the liquidity profile, including expectations for negative free cash flow. Evidence of rapid deterioration in the core business, lack of traction with the digital strategy, or the loss of a major retail partner could also result in a negative rating action.

The principal methodology used in this rating was the Global Business & Consumer Service Industry Rating Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Catalina Marketing Corp. (Catalina), headquartered in St. Petersburg, FL, provides consumer-driven personalized digital media solutions, including discount coupons, loyalty marketing programs and other consumer communications, through a variety of distribution channels like supermarkets as well as via mobile and online. Its revenue for the year ended December 31 was approximately $625 million.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

Karen Berckmann
Asst Vice President - Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

John Diaz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's lowers Checkout CFR to B3, assigns ratings to debt proposed to fund buyout
No Related Data.
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