Proceeds of the proposed note issue will be used to refinance the existing $200 million 7.375% senior unsecured notes due June 1, 2015. Ratings for the existing 2015 notes will be withdrawn upon completion of the transaction. The new note issue is expected to result in modest interest expense savings and extend a portion of its debt maturity profile. The new notes are expected to be guaranteed by all of Deluxe's material subsidiaries, the same guarantee present in the existing 2015 notes and accordingly the new notes are rated at the same level.
See below for a list of the company's ratings:
..Issuer: Deluxe Corporation
Corporate Family Rating, Unchanged at Ba2
Probability of Default Rating, Unchanged at Ba2
New $200 million Sr. Notes due 2020, assigned a Ba2 (LGD3, 42%)
$84.8 million 5% Sr. Unsecured Notes due 12/15/2012, Unchanged at B1 (LGD5, 87%)
$253.5 million 5.125% Sr. Unsecured Notes due 10/1/2014, Unchanged at B1 (LGD5, 87%)
$200 million 7.375% Sr. Notes due 6/1/2015, Ba2 (LGD3, 42%) expected to be withdrawn upon closing.
$200 million 7% Sr. Notes due 3/15/2019, Unchanged at Ba2 (LGD3, 42%)
Outlook, remains stable
Deluxe's Ba2 Corporate Family Rating reflects ongoing pressure on the company's checks business (which accounts for 61% of its revenue as of the end of 2011), the commodity nature of its forms business (which makes up 14% of revenue in 2011), and the competitive environment in these industries. In addition, the company faces execution risks associated with the company's strategy to further diversify its business into the marketing and small business services space. While the company does generate meaningful positive free cash flow after dividends ($158 million LTM as of Q3 2012), Moody's expects Deluxe will look to reinvest a portion of those proceeds back into the business through acquisitions and initiatives to drive organic growth and diversify its business lines, resulting in modest reductions to leverage over the rating horizon. Over the long term, Moody's believes Deluxe will need to maintain a more conservative leverage profile than comparably-rated issuers due to the declining outlook for its consumer check business, which historically has declined in the 7% - 8% range annually, although the rate of order decline has been below this level in recent quarters. There is the potential for the level of decline to increase going forward given the secular declines in check printing and the ongoing evolution of payment alternatives.
The company's ratings are supported by its strong market position and extensive printing capabilities, good EBITDA margins, and successful integration of recent acquisitions. In 2011, the company reduced expenses by approximately $60 million bringing its adjusted EBITDA margin to just over 25%, as compared to less than 20% in 2008. Since 2006 the company reduced expenses by $385 million and Moody's expects $50 million of additional cost reductions in 2012. Leverage has decreased from 2.8x in 2009 to 2.1x (including Moody's standard adjustments) at Q3 2012. We expect leverage to decline to 1.9x as the $85 million notes that mature in December 2012 are repaid with its existing cash balance. In 2012, the company acquired internet marketing service provider OrangeSoda, Inc. for $27 million in addition to $6 million of other acquisitions. In 2011, the company acquired Banker's Dashboard for $39.7 million and PsPrint in the amount of $45.5 million which have been integrated into its Financial Services and Small Business Services divisions, respectively. For 2013, we expect revenue and EBITDA to grow in the low single digits including acquisitions. The company also benefits from our expectation that it will be able to maintain its market share in the check printing business.
We anticipate Deluxe will maintain a good Liquidity profile with an SGL-2 rating as we expect the company to continue to generate meaningful free cash flow from its mix of mature and developing businesses. The company has a cash balance of $106 million as of Q3 2012 which should be more than enough to fund the maturity of its $85 million note in December 2012. The company's $200 million revolving credit facility which matures in February 2017, is currently undrawn (with $8.5 million of LC's issued), providing incremental liquidity to cover tuck-in acquisitions, seasonal swings in working capital or opportunistic repurchases of its debt. Moody's expects free cash flow of approximately $150 million per year over the rating horizon, which is in excess of 20% of its total debt at year end 2012, more than sufficient to fund interest expense and small to moderate sized acquisitions or investments. The company is expected to continue to make dividend payments of over $50 million a year in addition to modest stock repurchases. Interest coverage is anticipated to increase from 7.9x pro-forma for the proposed refinancing to over 9x by the end of 2013. Covenants under the revolving credit facility include a 3.25x maximum net Total Debt-to-EBITDA ratio (as defined, temporarily increasing to 3.5x for certain acquisitions), minimum 3.25x EBIT-to-interest expense, and a $50 million minimum liquidity requirement six months prior to the maturity dates of the 2014 and 2015 notes. We expect the company to maintain a comfortable cushion of compliance with its Net Debt to EBITDA and Interest coverage covenants.
The stable outlook reflects Moody's view that Deluxe will continue to maintain a good liquidity profile, with debt-to-EBITDA leverage declining below 2x following the repayment of its $85 million note at the end of 2012. Its conservative capital structure, continued cost reductions and growth of Small Business Services, aided by small tuck in acquisitions, should allow Deluxe to manage the continued decline in check volumes.
Success diversifying the business away from its core check printing business, consistent revenue growth, stable to higher EBITDA margins, and debt reduction leading to sustained debt-to-EBITDA ratios below 1.75x with free cash flow-to-debt in excess of 15%, could position the company for an upgrade.
The ratings could experience downward pressure if declines in check order volumes accelerate meaningfully above current rates, debt-to-EBITDA ratios exceed 3.0x from earnings declines or a leveraging transaction, or if free cash flow-to-debt declines below 10%.
The principal methodology used in rating Deluxe Corporation was the Global Publishing Industry Methodology 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 and other web-based services to help small businesses. In the financial services industry, Deluxe sells check programs and fraud prevention, customer loyalty and retention programs to banks. Deluxe also sells personalized checks, accessories and other services directly to consumers. Revenue for LTM period ending Q3 2012 totaled $1.5 billion.
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