Quad/Graphics Inc. #BB-# Rating Outlook Stable

Stocks and Financial Services Press Releases Tuesday February 27, 2018 09:47
CHICAGO--27 Feb--S&P Global Ratings
CHICAGO (S&P Global Ratings) Feb. 26, 2018--S&P Global Ratings today affirmed its 'BB-' corporate credit rating on U.S.-based commercial printer Quad/Graphics Inc. The rating outlook remains stable.

At the same time, we affirmed our 'BB-' issue-level rating and '3' recovery rating on the company's senior secured credit facility. The '3' recovery rating remains unchanged, indicating our expectation for meaningful (50%-70%; rounded estimate: 60%) recovery in the event of a payment default.

We also affirmed our 'B' issue-level rating and '6' recovery rating on the company's senior unsecured notes. The '6' recovery rating remains unchanged, indicating our expectation for negligible (0%-10%; rounded estimate: 0%) recovery in the event of payment default.

The rating affirmation reflects our view that the U.S. printing industry is in secular decline, Quad's product end-markets face intense pricing pressure, and its leverage is significant in the mid-to high-2x range, given the challenging business environment. These factors are only partially offset by Quad's leading market position as the second-largest U.S. commercial printer, its good margin stability, and its good free operating cash flow (FOCF) to debt in the mid- to low-20% range.

The stable outlook reflects our expectation that Quad will maintain FOCF to debt in the mid- to low-20% range, leverage in the mid-to-high-2x area, and adjusted EBITDA margins in the 10% area, despite our base-case forecast that its organic revenue will decline at a mid-single-digit percentage rate in 2018. We also expect that Quad will continue to effectively manage its costs and capital investment to maintain its healthy free cash flow generation.

We could lower the corporate credit rating if we believe Quad will likely maintain FOCF to debt below 15% and leverage above 3.5x. This could result from mid- to high-single-digit percentage revenue declines or EBITDA margin declines due to the difficulties reducing costs in line with revenue declines. Furthermore, we could lower the rating if covenant cushion declines below 15% or if the company pursues a large-debt financed acquisition that results in a sharp increase in leverage. If the secular decline of the industry accelerates we could reassess our downside scenario.

We could raise the rating if the company stabilizes and grows organic revenue while continuing to lower leverage. Under this scenario, we would be more confident that growth in the company's multichannel marketing revenues and EBITDA generation could offset print revenue declines.


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