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Global Credit Research - 01 Dec 2010
Approximately $525 million of new debt instruments rated
Toronto, December 01, 2010 -- Moody's Investors Service (Moody's) rated Cenveo Corporation's (Cenveo)
new senior secured credit facilities, comprised of a $375
million term loan and a $150 million revolving term loan,
Ba3. Proceeds will refinance existing credit facilities,
whose ratings were downgraded to Ba3 from Ba2 and will be withdrawn in
due course when the new facilities close. At the same time,
the company's corporate family and probability of default ratings
(CFR and PDR, respectively) were downgraded to B3 from B2.
The rating actions were prompted by a combination of two pending acquisitions
which continue a gradual business transformation, and the related
refinance transaction. The two acquisitions, "Gilbreth"
and MeadWestvaco's envelope manufacturing business, are both
unknowns as no tangible information concerning either target was disclosed.
Consequently, verifying the size of acquired cash flow streams,
the costs of integrating the two companies, the resulting benefits,
and resulting combined cash flow stream is quite difficult. Of
particular note, the refinance transaction effectively eliminates
a cash sweep that would have reduced debt early in 2011. As exemplified
by Cenveo's recent write down of nearly 40% of the acquisition
cost of the former Cadmus Communications, making acquisitions in
declining/low growth businesses involves execution risk. In turn,
the acquisitions provide uncertain de-levering potential at the
cost of certain debt reduction provided by the cash sweep. As Cenveo
gradually reinvents itself, with legacy commercial printing operations
being de-emphasized and being replaced by specialized packaging
businesses, execution risk will be a constant. As well,
the acquisitions consume liquidity and the company's position has weakened
somewhat. Despite this, Cenveo's SGL-3 speculative
grade liquidity rating, which indicates adequate liquidity,
remains unchanged. Cenveo also has two senior subordinated debt
issues that come due in 2013 and 2014. In addition to underlying
operational issues and cash generation, liquidity and refinance
matters will be key ratings considerations over the next couple of years.
Uncertainties related to these issues cause the rating outlook to be negative.
The following summarizes Cenveo's ratings and today's rating
..Issuer: Cenveo Corporation
....Senior Secured Bank Credit Facility,
Assigned Ba3 (LGD2, 16%)
....Corporate Family Rating, Downgraded
to B3 from B2
....Probability of Default Rating, Downgraded
to B3 from B2
....Senior Secured Bank Credit Facility,
Downgraded to Ba3 (LGD2, 16%) from Ba2 (LGD2, 16%)
....Senior Unsecured Regular Bond/Debenture,
Downgraded to Caa1 (LGD5, 70%) from B3 (LGD5, 71%)
....Senior Subordinated Regular Bond/Debenture,
Downgraded to Caa2 (LGD5, 88%) from Caa1 (LGD5, 89%)
....Speculative Grade Liquidity Rating,
Unchanged at SGL-3
....Outlook, Unchanged as Negative
Cenveo has a B3 corporate family rating, a B3 probability of default
rating, an SGL-3 speculative grade liquidity rating (indicating
adequate liquidity), and a negative rating outlook. We believe
that Cenveo is involved in a prolonged operational restructuring that
will see specialized packaging operations, including envelope manufacture,
replace commercial printing as the company's core business.
This transformation, while perhaps strategically necessary,
will take considerable time and will involve significant acquisition activity
and execution risk. As well, we believe that the company's
near-to-mid-term plans anticipate more robust top-line
growth and margin expansion than are likely in the context of limited
general economic expansion. We therefore see limited free cash
flow potential and anticipate that de-levering capacity will be
re-invested into the ongoing business transformation. With
limited free cash flow, constrained debt repayment capacity and
the inevitable execution risks, the rating is appropriately positioned
at the B3 level. In the background, Cenveo also has two senior
subordinated debt issues that come due in 2013 and 2014, a crowded
maturity window. The company's ability to access an appropriate
amount of junior capital over the next year or so will be a key milestone.
In addition to underlying operational issues and cash generation,
liquidity and refinance matters will be key ratings considerations over
the next couple of years. Uncertainties related to these issues
cause the ratings outlook to be negative.
As noted above, uncertainties related to refinance activities and
Cenveo's ability to access appropriate amounts of junior capital on a
timely basis - in what will be a crowded market place -
cause the ratings outlook to be negative..
What Could Change the Rating - Up
A rating upgrade is not contemplated within the rating horizon.
However, among other things, Moody's would consider an upgrade
or positive outlook if TD/EBITDA leverage were expected to be reduced
to 6.0x or lower on a sustained basis (with Moody's standard adjustments)
and positive free cash flow were expected to be sustained at approximately
5% of total debt. A rating upgrade would also have to involve
assurance of solid liquidity arrangements, an absence of near-term
refinance risks, improved industry fundamentals, and a somewhat
stabilized business platform.
What Could Change the Rating - Down
We would consider Cenveo's ratings for potential downgrade if free cash
flow generation was expected to be negative for a prolonged period and/or
if TD/EBITDA was expected to be in excess of 7x on a sustained basis.
A debt-financed acquisition of more than nominal size and/or adverse
liquidity developments (including those related to refinance matters)
could also result in downward rating pressure.
Headquartered in Stamford, Connecticut, Cenveo Corporation (Cenveo), a wholly-owned subsidiary of Cenveo, Inc. (a publicly traded holding company), is involved in commercial printing and packaging, envelope, form and label manufacturing, and publishing services.
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
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Cenveo's ratings were assigned by evaluating factors Moody's believes
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 Cenveo's core industries and Cenveo's
ratings are believed to be comparable to those of other issuers of similar
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Canada Inc.
Moody's rates Cenveo's credit facility Ba3, downgrades other LT ratings
70 York Street
Toronto, ON M5J 1S9
No Related Data.
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