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Rating Action:

Moody's revises RR Donnelley's rating outlook to negative

Global Credit Research - 30 Mar 2011

$5.2 billion of rated debt instruments affected

Toronto, March 30, 2011 -- Moody's Investors Service revised its rating outlook for R.R. Donnelley & Sons Company (RR Donnelley) to negative from stable as long term secular pressures cause industry fundamentals to remain at recessionary lows. As well, with the stagnant fundamentals indicating that average peak-through-trough operational risks have increased, management's preparedness to take compensatory actions to maintain overall business risk at the Baa3 level by reducing financial risks via reduced debt and financial leverage, is uncertain. As part of the same rating action, RR Donnelley's Baa3 senior unsecured ratings and Prime-3 commercial paper ratings were affirmed, the company's recently closed revolving credit facility was rated Baa3, and the company's existing senior unsecured shelf registration was rated (P) Baa3.

..Issuer: R.R. Donnelley & Sons Company

Outlook Actions:

....Outlook, Changed To Negative From Stable

Assignments:

....Senior Unsecured Bank Credit Facility, Assigned Baa3

....Multiple Seniority Shelf, Senior Unsecured Assigned (P)Baa3

Other Rating Actions:

..Senior Unsecured Ratings: Affirmed at Baa3

..Commercial Paper Rating: Affirmed at Prime-3

SUMMARY RATING RATIONALE

We view RR Donnelley as having a solid operating platform with good product diversity and aggregate scale, and a reasonable cost position featuring a significant variable component. Performance during the recent recession was quite good with the company remaining cash flow positive through-out. In addition, as an industry leader with good access to the capital markets and a generally good liquidity position, we do not anticipate abrupt changes in the company's risk profile. However, we think that operational risks are increasing as the business environment evolves. While most of the past several years has been characterized by poor supply/demand balance and suppressed margins, commercial printing's capacity utilization and industrial production value continue to languish at recessionary trough levels. So too does the consumption paper grades used by commercial printers. We estimate the annual volume of more than $100 billion North American commercial printing market is declining at a long term rate of +/- 3% and are concerned that a significant proportion of recessionary declines, which greatly exceed the long term average, may not fully revert even over a prolonged period. As well, visibility of forward activity levels is opaque and the timing and magnitude of any recovery is highly uncertain. We anticipate only modest top-line growth and expect little in the way of margin expansion. Indeed, even with the recent acquisition of Bowne, a +/- $700 million a year company, it will be a couple of years before revenue approaches the $11.6 billion recorded in 2007 and 2008. However, just as important as the evolving business environment is management's response and, to maintain the Baa3 rating in the face of heightened operational risks, we think more conservative financial policies are required. While the company's relatively low capital intensity leaves a significant free cash flow residual, it remains to be see whether management will be comfortable allocating a significant proportion of this towards debt reduction.

Rating Outlook

RR Donnelley's ratings outlook is negative. With tepid top-line growth and minimal margin expansion, it is unlikely that EBITDA will expand by enough to bring leverage below 3x within two years. Alternatively, given shareholder return pressures, we are concerned that management will not be prepared to allocate free cash towards debt reduction in amounts sufficient to adequately supplement cash flow based de-leveraging.

What Could Change the Rating - Up

Overall, absent a dramatic change in the company's financial policies, and with the unfavorable industry fundamentals, there is little potential of the company's ratings improving from their current position. Presuming reasonable industry fundamentals and preservation of solid liquidity arrangements, in the event Debt/EBITDA is expected to be sustained below 2.75x while (RCF-CapEx)/Debt exceeds 10%, positive ratings pressure could develop. This development would likely result only from a conscious management choice to operate with a dramatically more conservative capital structure; we do not anticipate this.

What Could Change the Rating - Down

Adverse industry developments, material debt-financed acquisition activity, or deteriorating liquidity could result in negative rating/outlook actions. As well, negative outlook and rating actions would be contemplated in the event Debt/EBITDA was expected to be sustained at or above 3.25x while (RCF-CapEx)/Debt lagged ~ 8%.

METHODOLOGICAL APPROACH

RR Donnelley'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 RR Donnelley's core industry and RR Donnelley's ratings are believed to be comparable to those of other issuers of similar credit risk. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

Corporate Profile

Headquartered in Chicago, Illinois, R.R. Donnelley & Sons Company (RR Donnelley) is North America's largest commercial printing company. RR Donnelley provides print and related services that include direct mail, financial printing, print fulfillment, labels, forms, logistics, call centers, transactional print-and-mail, print management, online services, digital photography, color services, and content and database management. Key customers compete in the publishing, healthcare, advertising, retail, technology and financial services industries.

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.

Toronto
Bill Wolfe
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Toronto
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
(416) 214-1635

Moody's Canada Inc.
70 York Street
Suite 1400
Toronto, ON M5J 1S9
Canada
(416) 214-1635

Moody's revises RR Donnelley's rating outlook to negative
No Related Data.
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