ACCO Brands Corporation -- Moody's Affirms ACCO Brands' Ba3 Corporate Family Rating; Outlook Stable
Rating Action: Moody's Affirms ACCO Brands' Ba3 Corporate Family Rating; Outlook Stable
Global Credit Research - 17 Aug 2020
New York, August 17, 2020 -- Moody's Investors Service, ("Moody's") affirmed ACCO Brands Corporation's (ACCO) Ba3 Corporate Family Rating (CFR) and Ba3-PD Probability of Default Rating. At the same time, Moody's affirmed the company's senior unsecured notes due 2024 at B1 and the speculative grade liquidity rating is unchanged at SGL-2. The outlook is stable.
While ACCO will be negatively impacted by the disruptions caused by the coronavirus, Moody's affirmed the ratings because the company has good liquidity to manage through temporary operating volatility including continued positive free cash flow. Moody's expects that growth will resume when conditions begin to return to normal. Moody's continues to believe that the company will be able to capitalize on its strong market position to restore credit metrics close to pre-coronavirus levels and that the company will reduce costs and preserve cash to manage through the current difficult environment. Moody's expects ACCO's debt/EBITDA will peak over the next 6 to 12 months at around 5x and then improve to around 4.0x to 4.5x by the end of 2021 and in line with Moody's expectations for the Ba3 rating given the operating profile.
Moody's expects that ACCO's operating performance will continue to be negatively impacted in the second half of 2020 due to lower demand for its products given the uncertainty caused by the coronavirus outbreak. Further challenging ACCO's operating performance will be a contraction of the global economy in 2020, particularly in key markets for ACCO such as the US, Europe and Brazil, before recovering in 2021. The uncertainty of school re-openings and the challenges caused by the slow return of employees to offices will negatively impact school and office supply purchases. Offsetting some of this decline will be an increase in ACCO's electronic products such as computer accessories and air purifiers. Moody's expects ACCO's revenues to decline about 20% in the second half of 2020 compared to second half of 2019 and recover by approximately 15% in 2021 compared to 2020. Operating profits will also be significantly down by approximately 45% in 2020 (vs. 2019) and improve by around 40% in 2021 (vs 2020), though not quite recover to 2019 levels. Moody's estimates that approximately half of ACCO's sales are related to education purchases, and half for commercial/office purchases.
Moody's took the following rating actions on ACCO Brands Corporation:
Ratings Affirmed:
.... Corporate Family Rating at Ba3;
.... Probability of Default Rating at Ba3-PD;
.... $400 million Senior Unsecured Notes due 2024 at B1 (LGD5);
Rating Unchanged:
.... Speculative Grade Liquidity Rating is unchanged at SGL-2;
Outlook Actions: .... Outlook remains stable. RATINGS RATIONALE
ACCO's Ba3 CFR reflects its good scale, product diversification within office/school products, and solid geographic diversification. The rating also incorporates Moody's expectation of near-term weakness in its operating performance due to the impact of the coronavirus pandemic as operating profits will continue to be pressured due to school closures and office disruptions. Moody's expects debt/EBITDA to remain high at above 5x in 2020 and then decline to below 4.5x by the end of 2021. ACCO's stated leverage goal of 2.5x debt/EBITDA (company calculated, vs. 3.5x as of 6/30/2020) gives Moody's comfort that the company will continue to focus on debt repayment over the next 12 to 18 months. Moody's anticipates that ACCO will resume share repurchases as permitted under its credit agreement only after it reduces leverage to its target levels. The rating also incorporates the cyclicality and the mature nature of the office and school supplies industry. Moody's estimates that approximately 60% of ACCO's sales are tied to discretionary consumer spending, which would be negatively impacted by a contraction of the economy. The remainder is driven more by business spending, which is also subject to cyclicality. Mitigating these factors is ACCO's solid market position within the office supply product categories, solid free cash flow, and good liquidity. Moody's also considers ACCO's high relevance to its largest customers as one of only a few global suppliers of office products.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. The consumer durables industry is one of the sectors most meaningfully affected by the coronavirus because of exposure to discretionary spending.
ACCO is publicly traded and has a balanced financial policy approach between shareholder distributions and leverage. ACCO has a moderate dividend ($6 million per quarter) and engages in share repurchases, which Moody's expects to be curtailed until leverage is reduced to the company's target level. Acquisitions are an event risk.
The stable outlook reflects Moody's view that ACCO will maintain an acceptable credit profile with free cash flow of approximately $100 million and $130 million in 2020 and 2021, respectively. Moody's also projects in the stable outlook that the company will use its free cash towards debt repayment such that debt to EBITDA falls below 4.5x by the end of 2021.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The rating could be downgraded if operating performance weakens because of customer losses or volume reductions, pricing pressure, or lower consumer spending, or if liquidity deteriorates. Debt-funded acquisitions or shareholder distributions could also result in a downgrade. Key credit metrics that could lead to a downgrade include debt/EBITDA sustained above 4.5x.
The rating could be upgraded if the company maintains solid reinvestment that sustains profitable growth with a stable to higher EBITDA margin, generates strong free cash flow. and reduces leverage. ACCOs financial policy would also need to be consistent with debt/EBITDA sustained below 3.5x.
Headquartered in Lake Zurich, IL publicly-traded ACCO Brands Corporation ("ACCO") manufactures and supplies office, school, calendar products and select computer and electronic accessories sold primarily in the US, Europe, Brazil, Australia, Canada and Mexico. Key brands include AT-A-GLANCE®, Barrilito®, Derwent®, Esselte®, Five Star®, Foroni®, GBC®, Hilroy®, Kensington®, Leitz®,Marbig®, Mead®, NOBO®, Quartet®, Rapid®, Rexel®, Swingline®, Tilibra® and Wilson Jones®. Annual revenues are approximately $1.8 billion as of June 30, 2020.
The principal methodology used in these ratings was Consumer Durables Industry published in April 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1060509. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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 credit rating action on the support provider and in relation to each particular credit 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 credit rating action, and whose ratings may change as a result of this credit 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.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Maria Iarriccio Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 John E. Puchalla, CFA Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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