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Rating Action:

Moody's upgrades Deluxe Corporation's CFR to Ba1; outlook changed to stable from positive

02 Oct 2014

New York, October 02, 2014 -- Moody's Investors Service (Moody's) upgraded Deluxe Corporation's (Deluxe) corporate family rating (CFR) to Ba1 from Ba2. The senior notes maturing in 2019 and 2020 were affirmed at Ba2 and the outlook was changed to stable from positive.

The upgrade of the CFR reflect the reduction in leverage to 1.5x as of Q2 2014 pro-forma for the October 2014 note repayment at maturity with $125 million in cash and a $135 million draw on its revolver. Also included in the rating, is the conservative financial policy of management, stability of operations (despite the secular pressure on Deluxe's check business) that allow for good EBITDA margins and very strong free cash flow.

The senior notes due in 2019 and 2020 were affirmed at current levels due to the repayment of the structurally junior 2014 senior unsecured notes that provided lift to the 2019 and 2020 notes that have a guaranty from Deluxe's material subsidiaries, while the 2014 notes did not.

A summary of Moody's rating actions are as follows:

..Issuer: Deluxe Corporation

Corporate Family Rating, upgraded to Ba1 from Ba2

Probability of Default Rating, upgraded to Ba1-PD from Ba2-PD

Speculative Grade Liquidity Rating, affirmed SGL-2

$253.5 million 5.125% senior unsecured notes due 10/1/2014, B1 (LGD5) withdrawn on 10/1/14 due to repayment

$200 million 7% senior notes due 3/15/19, affirmed Ba2 (LGD5 changed from LGD3)

$200 million 6% senior notes due 11/15/20, affirmed Ba2 (LGD5 changed from LGD3)

Outlook, changed to stable from positive

RATINGS RATIONALE

Deluxe's Ba1 CFR reflects the reduction of its leverage ratio from 2.3x at the end of 2011 to 1.5x as of Q2 2014 (pro-forma for the note repayment), largely due to debt repayment and EBITDA growth. The conservative financial policies of the company that has led to debt reduction and increased free cash flow as a percentage of debt to over 25% is also included in the rating. Additional support comes from its strong market position, growth in its small business services segment, stable EBITDA margin, and its track record of successfully integrating acquisitions. In 2013, the company reduced expenses by approximately $55 million and maintained its adjusted EBITDA margin of around 25% over the LTM ending Q2 2014. The margin was in line with the prior year, but significantly improved from 2008 when the margin was below 20%. Over the rating horizon, Moody's anticipates revenue growth in the low single digits and an EBITDA increase in the low to mid single digits. We expect leverage to decline as the revolver is paid down, but anticipate that more free cash flow will be directed to stock buybacks and dividends than it has in the past. Deluxe also benefits from our expectation that it will be able to maintain its market share in the check printing business over the intermediate to long term.

Also reflected in the rating, is the ongoing pressure on the company's check business (which accounted for 56% of its revenue in 2013), the commodity nature of its forms business (which makes up 13% of revenue), and the competitive environment in these industries. In addition, Deluxe faces execution risks associated with its strategy to further diversify the business into marketing solutions and other services. While the company generates meaningful positive free cash flow after dividends (over $175 million LTM Q2 2014), Moody's expects Deluxe will continue to reinvest a portion of its cash back into the business through acquisitions and initiatives to drive organic growth and diversify its business lines. Due to secular pressures on Deluxe's check business, it will need to maintain a more conservative profile than comparably-rated issuers.

Moody's anticipates Deluxe will maintain a good liquidity profile, as evidenced by its SGL-2 rating, and expects very strong free cash flow generation from its mix of mature and developing businesses. Moody's projects free cash flow of over $175 million per year over the rating horizon, more than sufficient to fund interest expense and small to moderate sized acquisitions or investments. Moody's expects that Deluxe will continue to make dividend payments (the dividend rate was increased by 20% in April 2014), spend $40 million in capex, repurchase shares, and pursue additional modest sized acquisitions.

The company's $350 million (unrated) revolving credit facility, which matures February 2019, will have $202 million of availability following the $135 million draw to fund the 2014 note repayment. The revolver provides incremental liquidity to cover acquisitions, fund seasonal working capital and letters of credit. Covenants under the revolving credit facility include a 3.25x maximum net Total Debt-to-EBITDA ratio (as defined, temporarily increasing to 3.50x for certain acquisitions) and a minimum 3.25x EBIT-to-interest expense. Moody's expects the company to maintain a substantial cushion of compliance with its financial covenants.

The senior notes due 2019 and 2020 are each rated Ba2, one level below the CFR given the senior secured revolving credit facility in the capital structure. Although the notes are unsecured, they benefit from a pari passu guaranty of Deluxe's material subsidiaries.

The stable ratings outlook reflects Moody's view that Deluxe will continue to maintain a good liquidity profile, with low single digit revenue growth and low to mid single digit EBITDA growth. Continued cost reductions and growth of marketing solutions within its Small Business Services segment should allow Deluxe to manage the continued decline in check volume under the most likely scenario.

An upgrade to investment grade would require a significant diversification of the business away from its core check printing and printed form business without a deterioration of its existing financial metrics. An increased business scale would also be supportive.

The ratings could experience downward pressure if declines in check order volumes accelerate meaningfully above current rates, debt-to-EBITDA exceeds 1.75x from earnings declines or a leveraging transaction, or if free cash flow-to-debt declines below 15%.

The principal methodology used in this rating was Global Publishing Industry published in December 2011. 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.

Deluxe Corporation ("Deluxe"), headquartered in St. Paul, MN, uses direct marketing, distributors and a North American sales force to provide a wide range of customized products and services to its customers. The company has been diversifying from its legacy printed-check business into a growing suite of business services, including logo design, payroll, web design and hosting, business networking, marketing, and other web-based services focused on small businesses. In the financial services industry, Deluxe sells check programs, fraud prevention, software solutions, customer loyalty, and retention programs to banks. Deluxe also sells personalized checks, accessories and other services directly to consumers. Revenue for LTM ended Q2 2014 totaled $1.6 billion.

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.

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: 212-553-0376
SUBSCRIBERS: 212-553-1653

John C 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 upgrades Deluxe Corporation's CFR to Ba1; outlook changed to stable from positive
No Related Data.
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