$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
....Outlook, Changed To Negative From
....Senior Unsecured Bank Credit Facility,
....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.
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
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
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%.
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.
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.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Canada Inc.
Donald S. Carter, CFA
MD - Corporate Finance
Corporate Finance Group
Moody's Canada Inc.
Moody's Canada Inc.
Moody's revises RR Donnelley's rating outlook to negative
70 York Street
Toronto, ON M5J 1S9