1/8/2023 0 Comments Type o negative art![]() Vericast has a track record of sponsor friendly transactions that have continued even as the company had underperformed expectations. (MacAndrews) and lack of board diversity and independence. Vericast's Caa3 CFR also reflects governance risks, including an aggressive financial strategy, concentrated ownership by MacAndrew & Forbes Holdings, Inc. The ratings continue 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. Vericast has limited product diversity and a concentrated customer base in the Harland Clarke business. Moody's projects that the company's leverage will rise to mid-6x by the end of 2022, despite continued restructuring and cost cuts. Vericast's leverage, with Moody's adjusted Debt/EBITDA at 6.2x at Q2 2022 (up from 5.6x a year ago), is high, particularly considering a business model that faces secular pressures. The company's high leverage and heavy debt service costs limit financial flexibility to effectively mitigate the structural business risks. The Caa3 corporate family rating reflects Vericast's significant level of business risk due to secular declines in both its check and print based advertisements businesses and a shareholder-friendly financial strategy and governance risks associated with private-equity ownership. Moody's thus views default risk as growing including the potential for a distressed exchange transaction. Moody's is concerned that the approaching debt maturities may not afford the company enough time to stabilize earnings and strengthen credit metrics enough to permit a successful refinancing of the debt at commercially available terms. Therefore, to preserve access to the ABL, Moody's believes that Vericast will likely seek to repay the term loan stub ahead of 4 August 2023 ABL springing maturity. Furthermore, the ABL revolver has a springing August 2023 maturity if the term loan stub is outstanding. Vericast faces a $53.7 million term loan stub maturity ($49.9 million currently outstanding) in November 2023 and ABL revolver expiration in April 2024. Moody's believes the company's print and digital marketing products could experience substantial pullback in the current inflationary environment. Vericast's interest coverage measured as (EBITDA Capex)/Interest Expense was weak at 1.3x as of LTM Q2 2022 (including Moody's adjustments) and will erode further absent significant improvements in EBITDA or capex cuts. The company's liquidity will continue to be pressured further by increasing cash interest costs from rising interest rates, as 40% of its debt is floating. The company's liquidity has also deteriorated as the earnings decline and rising costs led to negative free cash flow of -$88 million as of LTM Q2 2022. ![]() The company's year-to-date Q2 2022 revenue and EBITDA declined 9% and 23%, respectively, from the same period last year. ![]() Vericast's earnings and cash flows have declined sharply as a result of revenue decline in both DM&T and PP&E segments as well as rising materials and delivery costs, which are expected to remain high in 2023. Outlook, Changed To Negative From Stable Senior Secured 2nd Lien Global Notes, Downgraded to Ca (LGD6) from Caa3 (LGD6) Senior Secured 1st Lien Notes, Downgraded to Caa3 (LGD3) from Caa1 (LGD3) Senior Secured 1st Lien Bank Credit Facility, Downgraded to Caa3 (LGD3) from Caa1 (LGD3) Probability of Default Rating, Downgraded to Caa3-PD from Caa1-PD Corporate Family Rating, Downgraded to Caa3 from Caa1 Moody's took the following rating actions: High leverage and negative free cash flow create elevated risk of a balance sheet restructuring including a distressed exchange. A secular decline in the company's checks and print advertising business and rising costs will make it difficult for Vericast to improve cash flow to a level that is supportive of its current capital structure, which Moody's views as untenable. The downgrades reflect deterioration in Vericast's operating performance and Moody's view that macroeconomic headwinds and the investments needed to transform the business will lead to sustained negative free cash flow, diminished earnings and weak liquidity over the next 12-18 months. New York, Octo- Moody's Investors Service (Moody's) today downgraded Vericast Corp.'s ("Vericast") ratings, including corporate family rating to Caa3 from Caa1, and changed the outlook to negative from stable. Approximately $2.9 billion in rated securities affected
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