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R.R. Donnelley & Sons Company -- Moody's assigns a B1 rating to RRD's new secured notes

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Rating Action: Moody's assigns a B1 rating to RRD's new secured notesGlobal Credit Research - 13 Apr 2021$350 million of new debt ratedToronto, April 13, 2021 -- Moody's Investors Service ("Moody's") assigned a B1 rating to R.R. Donnelley & Sons Company's ("RRD") proposed $350 million senior secured notes due in 2026. The notes have the potential to be upsized. The company's B2 corporate family rating (CFR), B2-PD probability of default rating, B1 senior secured term loan B rating, B3 senior unsecured notes and debentures ratings, SGL-3 speculative grade liquidity rating, and stable outlook remain unchanged.The refinancing is essentially leverage neutral and the proposed notes will rank pari-passu with RRD's existing term loan B. Net proceeds will be used to reduce portions of the amounts outstanding under the term loan B and ABL facility.Rating Assigned:Senior Secured Notes due 2026, B1 (LGD3)RATINGS RATIONALERRD's B2 CFR is constrained by: (1) high business risk from continuing decline in revenue and profitability due to digital substitution; (2) execution risks as it transforms itself from a commercial printer focused on manuals, publications, brochures, business cards to innovative businesses such as packaging, labels, direct marketing and digital print in order to mitigate secular pressures in commercial printing; and (3) leverage (adjusted Debt/EBITDA) that is expected to be sustained around 5x in the next 12 to 18 months (4.8x for 2020), a level that is still high given ongoing secular pressures. The rating benefits from: (1) good market position, large scale and client diversity; (2) management's focus on debt repayment from free cash flow and asset sale proceeds; (3) continued cost reduction, which partially mitigates the pressure on EBITDA; and (4) adequate liquidity, including its ability to generate positive free cash flow despite ongoing pressures.RRD has moderate environmental risk. The company has exposure to hazardous substances and although there have been no material environmental liabilities in the past few years, it could face material costs related to remediation of contaminated manufacturing facilities should that occur.RRD has high social risk tied to the coronavirus pandemic and data breaches. The company's revenue was negatively impacted in 2020 because of the pandemic, and Moody's expects continued headwinds in 2021. Due to digital substitution, RRD is transforming its business model into higher margin innovative digital products and services, which exposes the company to increasing data security and customer privacy risk. The shift to digital will require a continuing focus on cost reduction for RRD.RRD has moderate governance risk. Although the company does not have a publicly stated leverage target, its financial policy has been prudent, characterized by management's attention to debt repayment rather than shareholder-friendly actions. RRD does not make share repurchases and suspended its dividend payments because of the pandemic in order to conserve liquidity.RRD has adequate liquidity (SGL-3). Sources approximate $340 million while the company will have about $6 million of term loan amortization in the next 4 quarters (proceeds from the proposed notes will fund $56 million of debentures due in April 2021). Liquidity is supported by $289 million of cash at year end 2020 and Moody's expected free cash flow of about $50 million over the next 12 months. At year 2020, RRD had $576 million of availability under its $800 million ABL facility that matures in September 2022 - no drawings, $56 million of letters of credit and subject to a borrowing base. Since the facility becomes current (September 2021) in Moody's four quarter liquidity horizon, the amount available has not been considered as a source of liquidity. RRD's facility is subject to a fixed interest charge coverage covenant and cushion is expected to exceed 25% through the next four quarters. The company has limited ability to generate liquidity from asset sales.The stable outlook reflects Moody's expectation that RRD will maintain at least adequate liquidity (including generating positive free cash flow) and sustain leverage around 5x as the company manages its cost structure in line with revenue decline through the next 12 to 18 months. Moody's expect that the majority of proceeds from any asset sale would be used to repay debt.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGThe rating could be upgraded if the company generates sustainable positive organic growth in revenue and EBITDA and sustains leverage below 4x (4.8x for 2020).The rating could be downgraded if the company is not able to successfully execute its transformation into innovative businesses to minimize pressure from commercial printing. Quantitatively this would reflect Moody's expectations of ongoing revenue and EBITDA declines or if leverage is sustained above 5x (4.8x for 2020). Weak liquidity could also cause a downgrade, including an inability to refinance its $800 million ABL facility before it becomes current in September 2021.The principal methodology used in this rating was Media Industry published in June 2017 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1077538. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Headquartered in Chicago, Illinois, RRD is the leader in the North American commercial printing industry. Revenue for the year ended December 31, 2020 was $4.8 billion.REGULATORY DISCLOSURESFor 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 rating has been disclosed to the rated entity or its designated agent (s) and issued with no amendment resulting from that disclosure.This rating is 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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.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. Peter Adu, CFA Vice President - Senior Analyst Corporate Finance Group Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Donald S. Carter, CFA MD - Corporate Finance Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Canada Inc. 70 York Street Suite 1400 Toronto, ON M5J 1S9 Canada JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 © 2021 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.CREDIT RATINGS ISSUED BY MOODY'S CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY, “PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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