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Vericast Corp. -- Moody's downgrades Vericast's ratings to Caa3, changes outlook to negative on cancelled refinancing

·18 min read

Rating Action: Moody's downgrades Vericast's ratings to Caa3, changes outlook to negative on cancelled refinancingGlobal Credit Research - 08 Mar 2021Approximately $2.5 billion in rated securities affectedNew York, March 08, 2021 -- Moody's Investors Service ("Moody's") downgraded Vericast Corp.'s (Vericast) corporate family rating (CFR) to Caa3 from Caa1, probability of default rating to Caa3-PD from Caa1-PD and downgraded the ratings on the existing debt instruments due 2022/2023 to Caa3 from Caa1. The rating outlook was changed to negative from stable. Moody's withdrew the ratings assigned to Vericast's cancelled refinancing, including the B3 rating on the amended and extended term loan due 2026, the B3 rating on the first lien senior secured note due 2026 and the Caa3 rating on the second lien secured note due 2027. The rating actions follow Vericast's decision to terminate its previously proposed refinancing transaction.The ratings downgrade and outlook change to negative is prompted by Vericast's termination of the proposed refinancing and reflects risks to the sustainability of the capital structure given near-term debt maturities, the expectation of high leverage and negative pressure on earnings. Absent a meaningful improvement in operating performance, asset sales or sponsor's support, secular industry declines make it difficult for the company to materially reduce its high leverage and address its significant $2.2 billion of 2022/2023 maturities, thereby elevating default risk. 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.Vericast's $800 million senior secured notes come due in August 2022. The company's existing $1.7 billion first lien term loan ($1,434 million outstanding balance at year-end 2020) comes due in November 2023 and has a springing maturity in May 2022, if the secured notes maturing in 2022 are still outstanding. The company's $250 million ABL facility (with a $96 million balance as of December 31, 2020) is now current, expiring in February 2022 and has a springing maturity in November 2021 if certain conditions are met. Downgrades: ..Issuer: Vericast Corp. .... Corporate Family Rating, Downgraded to Caa3 from Caa1.... Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD....Senior Secured Bank Credit Facility, Downgraded to Caa3 (LGD4) from Caa1 (LGD3)....Senior Secured Regular Bond/Debenture, Downgraded to Caa3 (LGD4) from Caa1 (LGD3) Withdrawals: ..Issuer: Vericast Corp. ....Senior Secured Bank Credit Facility, Withdrawn , previously rated B3 (LGD3)....Senior Secured 1st Lien Regular Bond/Debenture, Withdrawn , previously rated B3 (LGD3)....Senior Secured 2nd Lien Regular Bond/Debenture, Withdrawn , previously rated Caa3 (LGD5) Outlook Actions: ..Issuer: Vericast Corp. ....Outlook, Changed To Negative From StableRATINGS RATIONALEThe Caa3 corporate family rating reflects 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, governance risks associated with private-equity ownership and its debt-heavy capital structure that may be unsustainable. Vericast's refinancing risk is high given significant near term maturities. 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.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 on-going 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.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.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.Following the cancellation of the proposed refinancing, Moody's views Vericast liquidity as weak due to significant debt maturities over the next 18-24 months. The company faces expiration of its $250 million ABL facility in February 2022 (subject to a springing maturity in November 2021 if certain conditions are met). As of December 31, 2020 Vericast had $51 million cash and $121 million availability under its $250 million ABL facility, giving effect to a $96 million drawn against it and $11 million in letters of credit. During calendar 2021, Moody's expect that Vericast will likely need to rely on its revolver borrowing to fund its basic cash needs, including capital expenditures in the $50-$60 million range, working capital, mandatory debt amortization of $100 million. 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 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. 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 Caa3-PD Probability of Default Rating, an average expected family recovery rate of 50% at default given the largely first lien secured debt capital stack and the particular instruments' ranking in the capital structure. The $800 million first lien senior secured note due August 2022 and the $1.7 billion first lien secured term loan due November 2023 are rated Caa3, same as the CFR. We rank the term loan behind the ABL revolver (unrated) in Moody's loss given default notching framework due to the revolver's first lien on receivables, inventory and related assets with a second lien on other material assets. The $800 million senior secured note and the $1.7 billion term loan are pari passu with the $325 million 12.5% senior secured note due 2024 (unrated). The term loan does not have any financial covenants.The negative rating outlook reflects the elevated risk of default unless the company can refinance debt maturities on commercially viable terms, ensure uninterrupted access to a revolving line of credit and reverse its weak operating performance.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSHeightened near-term risk of default including through distressed exchange transactions, or a reduction in the recovery assumption could lead to further downgrades. The inability to secure uninterrupted access to a revolving credit facility or weakening of liquidity would also pressure the company's ratings including through such factors as significant ABL usage or weaker or negative free cash flow.An upgrade or a shift to a stable rating outlook is unlikely unless the company is able to proactively address its 2022/2023 debt maturities at commercially viable terms.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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