Fitch Affirms ACCO's IDR at 'BB'; Outlook Stable

NEW YORK--()--Fitch Ratings has affirmed the ratings for ACCO Brands Corporation (ACCO) as follows:

ACCO

--Long-term Issuer Default Rating (IDR) at 'BB';

--$250 million senior secured revolving credit facility due May 2018 at 'BB+;

--$530 million in senior secured Term Loan A due May 2018 at 'BB+';

--$500 million senior unsecured 6.75% notes due April 2020 at 'BB'.

The bank revolving credit facility, Term Loan A and the senior unsecured notes are guaranteed by domestic (mostly Delaware and Nevada) subsidiaries.

This action affects approximately $920 million of outstanding debt. The Rating Outlook is Stable.

KEY RATING DRIVERS

Improving Credit Protection Measures

Leverage, FCF, and margins have improved, supporting good liquidity and access to the capital markets despite near-term increases in business model risk. Fitch views the company's focus on maintaining solid metrics and directing much of its FCF to debt reduction as highly positive to the rating in the near term. However, if revenues continue to decline at mid-single digit levels due to secular declines it will be more difficult to maintain supportive credit protection measures and the ratings.

Negative Organic Growth Likely

The office products industry is cyclical and is experiencing slow secular declines due to a shift towards digital technologies. Additionally, the merger of Office Depot, Inc. and OfficeMax Incorporated in November 2013 will further accelerate the move away from the office superstore (OSS) channel towards mass and ecommerce adding further pressure to the industry's growth. ACCO's business model risk caps its rating to the 'BB' level and in the medium term can place more downward pressure on the rating.

ACCO has a material exposure to the OSS channel which accounted for approximately 25% of 2013's $1.8 billion in revenues. Fitch projects that the OSS channel will reduce its overall square footage from 2012 to 2015 by 20%. However, by the end of 2015, much of the store base right-sizing should be accomplished, likely leaving the slow secular declines as the remaining issue after 2015.

Fitch expects revenues to decline in the mid-single digit range in 2014 given near-term pressures. ACCO has had negative organic growth in 20 of the past 28 quarters, much of which is centered around its North American and Computer Products Group segments. There is organic growth in international markets but it is muted. The international segment is just 32% of total revenues and its .9% organic growth in 2013 is a significant turnaround from the -6% in 2012. However, it is not likely to accelerate enough to offset pressure in the North Americas segment (59% of 2013 revenues) as well as in the ever rising competition and short product life cycle issues in the computer products segment (9%).

ACCO partially addressed the move to faster growing mass channels with the MeadWestvaco's Consumer and Office Products division (Mead) acquisition in 2012. It will need to accelerate its presence outside the OSS channel either organically or through acquisitions to attain any level of growth.

Strong FCF Despite Headwinds

ACCO has generated positive FCF every year since 2007 except for 2012, when the company had approximately $78 million in transaction and refinancing fees related to the Mead acquisition. Excluding the fees, 2012's reported -$8 million in FCF would have continued to demonstrate the company's strong FCF generation despite secular headwinds. Last year's $158 million in FCF was a record bolstered mainly by the Mead acquisition and secondarily by strong cost saving initiatives. ACCO recently announced restructuring and productivity which should support solid FCF generation next year even if sales declines are modestly more than management's guidance of mid-single digit declines. Fitch expects FCF in 2014 to be in the range of management's public guidance of $140 million.

Appropriate Cost Structure

ACCO has maintained a solid grip on its cost structure and improved profitability despite negative or limited organic growth. Further, the company has and is likely to continue exiting unprofitable business lines and relationships. As a result, EBITDA margins steadily increased from the upper single digits in 2008 to almost 12% by 2011. Then, through the highly accretive acquisition of MeadWestvaco Corporation's Consumer & Office Products division (Mead) in May 2012, margin growth accelerated even further to 14.6% in 2013. Actions slated for 2014 to take 12% out of North America's headcount, is expected to at least stabilize margins even if there revenues decline modestly more than expected.

Consolidator Strategy But Mindful of Rating

ACCO intends to be a leader in this consolidating industry. Fitch expects the company will focus on accretive acquisitions to reduce costs with a positive benefit to profitability and FCF. However, this will result in periodic increases in leverage.

Fitch is comfortable with the strategy as long as management focuses on reducing debt quickly to sub-4x levels in 12 - 18 months. This was observed in the transformative Mead acquisition where leverage increased to 4.7x in 2012 but was 3.6x by the end of 2013. The company has publicly stated it will use 2014's FCF for debt reduction and that there will be no dividends or share repurchases initiated until leverage is below 2.5x. On a pro-forma basis for a $140 million pay-down, leverage would be near 3x and high for the rating category absent business model issues.

Ample Liquidity, Modest Maturities

ACCO had good liquidity of $289 million at year end comprised mostly of $236 million in revolver availability. Liquidity should also be buttressed by strong FCF in 2014, much of which will be directed toward debt reduction. Required debt amortization is modest through 2017 at less than $70 million annually. Mandatory prepayments at year end using excess FCF will likely alter the debt maturity schedule in the future.

Debt Structure

The bank credit facility and term loans are secured by a first-priority lien on substantially all assets. There is a maximum leverage covenant of 4.5x which becomes more restrictive over time and a fixed-charge coverage covenant of at least 1.25x. ACCO has a comfortable cushion in these key financial covenants.

RATING SENSITIVITIES

An upgrade beyond the 'BB' range is not anticipated in the near term given business model issues and the company's strategy to be a consolidator in the industry.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Material revenue and profit declines would pressure the rating or Outlook. Business model risk has increased but in the near term there is ample protection for lenders and note-holders. If there is a determination at the next review cycle that risk has accelerated, such that credit protection measures could deteriorate markedly within 12 - 18 months, a negative rating action is likely.

--Additionally, gross leverage of 3.75x at year end given seasonal cash flow generation, would be a concern and could pressure the ratings. The leverage target may become more restrictive if revenue declines accelerate.

--A large debt-financed acquisition without a concrete plan to reduce debt meaningfully in the 4x range in the 12 - 18 month time frame could lead to a negative rating action. However, Fitch expects the company to remain prudent.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (August 2013);

--'ACCO Brands Corp, Full Rating Report (June 2013)

--'Office Supply Sector: Consolidation Not a Panacea' (October 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Effective 12 August 2011 to 8 August 2012

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Office Supply Sector: Consolidation Not a Panacea (Cyclical and Secular Challenges Persist)

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=718158

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=827249

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Contacts

Fitch Ratings
Primary Analyst:
Grace Barnett, +1-212-908-0718
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
William Densmore, +1-312-368-3125
Senior Director
or
Committee Chairperson:
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst:
Grace Barnett, +1-212-908-0718
Director
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
or
Secondary Analyst:
William Densmore, +1-312-368-3125
Senior Director
or
Committee Chairperson:
Michael Zbinovec, +1-312-368-3164
Senior Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
brian.bertsch@fitchratings.com