Rating Action: Moody's affirms Vericast's Caa1 CFR, rates proposed refinancing; outlook is stableGlobal Credit Research - 25 Feb 2021Approximately $2.8 billion in rated securities affectedNOTE: On February 26, 2021, the press release was corrected as follows: In the first sentence of the methodology paragraph, the principal methodology release date was changed to June 2017. Revised release follows.New York, February 25, 2021 -- Moody's Investors Service (Moody's) affirmed Vericast Corp.'s (Vericast) ratings, including the Caa1 corporate family rating (CFR). Moody's also assigned a B3 rating to Vericast's proposed $775 million amended and extended term loan due 2026 and $1.3 billion first lien senior secured note and rated the company's $700 million second lien secures note at Caa3. The outlook is stable.The proceeds from the new debt issuance will be used to repay the existing debt, including the $800 million secured notes due August 2022 and the existing first lien term loan due November 2023 (with a springing maturity in May 2022) that had $1,434 million outstanding at year end 2020. The existing term loan and the $800 million secured note ratings will be withdrawn once repaid. Moody's ratings and outlook are subject to receipt and review of final documentation.The affirmation of Vericast's Caa1 CFR reflects the extension of the company's debt maturity profile in connection with the proposed refinancing. Following the close, the next debt maturity will be the $775 million of the amended term loan due 2026. The proposed refinancing is credit positive because it eliminates near term refinancing risks and extends access to external liquidity without materially increasing interest expense or leverage. However, Vericast remains exposed to significant business risk stemming from the secular decline in the check and print advertisement business, and Moody's considers leverage high given these secular risks. Affirmations: ..Issuer: Vericast Corp. .... Corporate Family Rating, Affirmed Caa1.... Probability of Default Rating, Affirmed Caa1-PDAssignments:..Issuer: Vericast Corp.....Senior Secured 1st Lien Bank Credit Facility, Assigned B3 (LGD3)....Senior Secured 1st Lien Regular Bond/Debenture, Assigned B3 (LGD3)....Senior Secured 2nd Lien Regular Bond/Debenture, Assigned Caa3 (LGD5) Outlook Actions: ..Issuer: Vericast Corp. ....Outlook, Remains Stable RATINGS RATIONALE The Caa1 corporate family rating continues to reflect Vericast's significant level of business risk due to secular declines in both its check and Valassis' print based advertisement, a shareholder-friendly financial strategy and governance risks associated with private-equity ownership. The company's high leverage and heavy debt service costs limit financial flexibility to effectively mitigate the structural business risks. The company has limited product diversity and a concentrated customer base in the Harland Clarke business. The ratings continues to garner support from the company's large scale, strong relationships with its clients and multi-year contracts varying between 2-4 years for most of its clients, and strong market positions in the print advertisement and check printing businesses. Management demonstrated its ability to cut costs and grow revenues notwithstanding the pressure from declining check volumes in the past, which had resulted in a good track record of cash flow generation historically. Vericast believes its focus on helping financial institution clients grow deposit accounts creates a value added relationship that improves customer retention.Check order volumes face secular pressures that Moody's believes will continue and would likely accelerate due to the wide and growing adoption of less costly and more convenient electronic, on-line and mobile payment alternatives. This trend is evidenced by Vericast's financial institutions check volumes declining at an average rate of 6.1% for the past three years and 7.5% drop in 2020. Moody's believes that continued pricing increases will ultimately render check usage prohibitively expensive, with the potential to accelerate volume declines that will likely lead to erosion in the company's revenue base. The continual shift to new technologies continues to pose a threat to the check printing businesses. The Valassis division faces pressure from the secular demand shift of advertisers' marketing spend to internet-based / digital media channels, as well as the ensuing pricing pressure on traditional print-based media, that was further exacerbated by the COVID-19 outbreak. The company's digital revenue is growing but is still small, representing less than 10% of its 2020 revenues. Moody's does not expect the structural pressures on the company's business to ease in the future. Any acceleration in the pace of decline in check or print advertising revenue could exceed any growth in the much smaller digital revenue.Revenue concentration in printed checks and related services is meaningful. The company's top 20 clients accounted for approximately 34% of its FY2020 revenue, up from 26% and 25% during 2019 and 2018, respectively, with sales to Bank of America and Wells Fargo representing a significant portion of the company's revenue in the Harland Clarke segment. Such high customer concentration in a secularly declining business exposes Vericast to pricing pressure from large customers and a meaningful loss of revenue risk should the largest customers choose not to extend their contracts with Vericast.Vericast's leverage, with Moody's adjusted Debt/EBITDA at 6.4x at 2020 year-end, is high, particularly in light of a business model that is in a secular decline. Moody's projects that the company's leverage will not change materially from its current level absent aggressive cost reduction, although some volume recovery from the COVID-related pandemic will support EBITDA and revenue growth in late 2021 and 2022.Pro-forma for the recapitalization, Moody's views Vericast liquidity as adequate. Moody's expect existing cash ($100 million, pro-forma for the recap), projected free cash generation and effective availability under the proposed $250 million ABL facility (undrawn at close) will provide enough liquidity to fund capital expenditures in the $50-$60 million range, working capital, debt amortization of $50 million, and basic cash needs over the next twelve months. Moody's expects the company to generate break-even to negative free cash flows in 2021.ESG CONSIDERATIONSSocial risks taken into Vericast's ratings include the aforementioned evolving demographic and social trends and changing consumer preferences. In addition, the rating also takes into account social risk from potential data privacy breaches from a cyber breach.Given its private equity ownership, Vericast's corporate governance risk is high. As part of the proposed recapitalization, the tax sharing agreement between the parent MacAndrews & Forbes Holdings, Inc. ("MacAndrews") and its subsidiaries, including Vericast, will be terminated and the $138 tax receivable owed to Vericast by MacAndrews will be cancelled on a cashless basis for no consideration. Moody's views this move as akin to Vericast's FY2017 termination of the $175 million loan to MacAndrew without repayment. Vericast has a track record of sponsor friendly transactions that have continued even as the company had underperformed expectations.STRUCTURAL CONSIDERATIONSThe instrument ratings reflect the probability of default of the company, as reflected in the Caa1-PD Probability of Default Rating, an average expected family recovery rate of 50% at default given the mix of first and second lien secured debt in the capital structure, and the particular instruments' ranking in the capital structure. The proposed $1.3 billion first lien senior secured note due 2026 and the amended and extended $775 million first lien secured term loan due 2026 are rated B3 and reflect loss absorption in a distress scenario from the second lien term loan. Both the $775 million first lien term loan and the $1.3 billion secured note are ranked above the $700 million second lien note, resulting in a one-notch uplift from the CFR under the proposed capital structure. However, any increase in a proportion of the first lien debt relative to the second lien note could lead to a downgrade of the first lien debt rating. The rating on the proposed $700 million of second lien term loan is Caa3, reflecting its junior position in the capital structure.The stable outlook reflects Moody's expectation for a successful and timely completion of the proposed refinancing. The stable ratings outlook also incorporates Moody's expectation that Vericast will conservatively manage its liquidity, return to positive free cash flow generation in 2022 even on declining revenues and will continue its cost reductions.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSRatings could be upgraded if Vericast demonstrates sustained organic revenue and EBITDA trends, profitably grows its Digital Solutions segment such that digital revenue and EBITDA growth more than offsets a decline in the Print, Payment & Engagement segment. An upgrade will also require good liquidity with an extended debt maturity profile, and debt-to-EBITDA below 5x (Moody's adjusted) on a sustained basis with a financial policy supportive of operating at such leverage levels.Ratings could be downgraded should the pace of revenue decline accelerate and liquidity deteriorate due to continued negative free cash flow or inability to access its ABL facility. Failure to refinance the 2022 and 2023 maturities as part of the proposed refinancing could lead to a downgrade.The principal methodology used in these ratings 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 San Antonio, TX, Vericast Corp. ("Vericast") is a provider of check and check related products, direct marketing services and customized business and home office products. Its Valassis division offers clients mass delivered and targeted programs to reach consumers primarily consisting of shared mail, newspaper and digital delivery in addition to coupon clearing and other marketing and analytical services. The company's 2020 annual revenue was $2.6 billion. Vericast is owned by MacAndrews & Forbes Holdings, Inc. ("MacAndrews"), a wholly owned entity controlled by Ronald O. Perelman.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 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_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. Dilara Sukhov, CFA Asst Vice President - Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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