NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for ACCO Brands Corporation's (ACCO) Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is Stable. A full list of ACCO's ratings follows at the end of this release.
Fitch's ratings on ACCO are predicated on the company's stable free cash flow and ongoing debt paydown, but constrained by concerns regarding secular challenges and channel shifts within the company's merchandise mix as well as the risk of further debt-financed acquisitions. The time management (calendars) and storage categories represent approximately 30% of ACCO's sales, and both categories have seen declines given ongoing shifts online. In addition, the office supply superstores, which represent 24% of ACCO's sales, have been losing share to other players including general merchants and online-only competitors.
KEY RATING DRIVERS
Limited Organic Growth Yields Tight Margin Management
The office products industry is experiencing a slow secular decline due to a shift towards digital technologies. The growth of private label penetration in the industry has further pressured sales of branded products (including many of those in ACCO's portfolio). Finally, channel shift away from the traditional office products retailers and toward discounters and online-only players have forced vendors like ACCO to optimize channel management to maintain share. While ACCO benefits from its market leading position, with over 80% of sales generated from products ranked #1/#2 in their respective categories, the company has not been immune to industry challenges.
To preserve and improve margin in the difficult operating environment, ACCO has maintained a tight focus on its cost structure and improved profitability despite negative or limited organic growth. Further, the company has been and is likely to continue exiting unprofitable business lines and relationships, such as the 2015 exit from the tablet accessories market. As a result of the company's efforts, 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 more than 15% in 2015. To mitigate ongoing sector pressure, Fitch expects the company will continue to actively manage its cost structure.
Growth through Acquisitions
ACCO intends to be a leader in this consolidating industry. Fitch expects the company to focus on accretive acquisitions to reduce costs with a positive benefit to profitability and FCF. However, this will result in periodic increases in leverage. It partially addressed the move to faster-growing mass channels with the MeadWestvaco Consumer and Office Products division (Mead) acquisition in 2012.
In second quarter 2016 (2Q16), ACCO announced the acquisition of the remaining 50% of Pelikan Artline Pty Limited, its joint venture (JV) company serving the Australia and New Zealand markets, as well as the buyout of a minority interest in a subsidiary of the JV. From a strategic standpoint, Fitch views the buyout as a modest positive, as it will give ACCO control over its Australian business and allow for cost synergies with existing operations.
Strong Cash Flow and Improving Leverage
ACCO has generated positive free cash flow (FCF) every year since 2007 except for 2012, which was modestly negative after adjusting for approximately $78 million in transaction and refinancing fees related to the Mead acquisition. The company has an excellent track record in meeting its public FCF goals. The company generated $146.6 million FCF in 2015, and Fitch expects it to be flat at around $140 million in 2016, and around $150 million annually thereafter.
Leverage, FCF, and margins have improved, supporting good liquidity and access to the capital markets despite secular challenges. Fitch views the company's focus on maintaining solid metrics and directing much of its FCF to debt reduction as positive for the rating. ACCO has demonstrated a strong track record in deleveraging post its strategic acquisition of Mead in 2012. Bank covenant leverage ratio was reduced from over 3.5x in 2012 to below 3x in 2015, and Fitch expects the company to continue directing a meaningful portion of its FCF to debt paydown.
ASSUMPTIONS
--Revenue is expected to increase 5% to $1.58 billion in 2016 as a result of the incremental $70 million in sales from the Australian JV purchase. Revenue for the existing ACCO business is expected to be flattish on a constant currency basis annually.
--EBITDA is expected to be in the $250 million range in 2016, as positive EBITDA from the Australian JV will be somewhat mitigated by the impact of the strong U.S. dollar on ACCO's operating results. Flattish sales, coupled with strong expense management, could keep EBITDA range-bound at around $250 million over the next several years, absent any acquisitions.
--FCF is expected to be around $140 million in 2016, in line with 2015 results, and $150 million thereafter. In 2016, Fitch anticipates ACCO will use FCF to pay down debt and continue to repurchase its equity. Absent an acquisition, which ACCO could finance with a combination of FCF and debt, Fitch assumes that beginning 2017 FCF is used to repurchase shares and reduce debt, driving leverage from the low-3.0x range in 2016 to below 3.0x.
RATING SENSITIVITIES
Future developments that may, individually or collectively, lead to a positive rating action include:
--An upgrade beyond the 'BB' range is possible if the company makes acquisitions that change its business mix or model to one with less cyclical or higher growth prospects while maintaining leverage below 3.0x. However, an upgrade is not anticipated in the near term given existing business model issues.
Future developments that may, individually or collectively, lead to a negative rating action include:
--Inability of the company to cut costs to offset the impact of declining sales and maintain current credit protection measures and cash flows.
--Sustained gross leverage at or above 4x, with FCF materially below expectations.
--A large debt-financed acquisition without a concrete plan to reduce debt meaningfully below 4x in the 24-month time frame post a transaction could lead to a negative rating action.
LIQUIDITY AND DEBT STRUCTURE
ACCO had ample liquidity of $229 million as of June 30, 2016, composed of $96 million cash and cash equivalents, and revolver availability of $133 million. Liquidity is expected to be even higher at year-end, ACCO's seasonal peak. The company's debt includes borrowings under its $300 million revolver ($158 million outstanding as of June 30, 2016), term loans, and $500 million in unsecured notes. As of June 30, 2016, outstanding term loan amounts include $151 million on the company's U.S. term loan A and $74 million on the company's AUD term loan A, which was issued this year to finance the Pelikan Artline Pty Limited JV buyout. Annual term loan amortization is manageable at $30 million-$40 million per year, with no significant maturities until 2020.
Fitch has assigned Recovery Ratings (RRs) to the various debt tranches in accordance with criteria, which allows for the assignment of RRs for issuers with IDRs in the 'BB' category. Given the distance to default, RRs in the 'BB' category are not computed by bespoke analysis. Instead, they serve as a label to reflect an estimate of the risk of these instruments relative to other instruments in the entity's capital structure. Fitch assigned an 'RR1' to first lien secured debt, notching up one from the IDR, indicating outstanding recovery prospects (91% - 100%) given default. The revolver and US Term Loan A are secured by substantially all assets of ACCO while the AUD Term Loan A is secured by substantially all assets of ACCO's Australian subsidiary, ACCO Brands Australia Holding Pty. Unsecured debt will typically achieve average recovery, and thus was assigned an 'RR4', or 31% - 50% recovery.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
ACCO Brands Corporation
--Long-term Issuer Default Rating (IDR) at 'BB';
--$300 million senior secured revolving credit facility due April 2020 at 'BB+/RR1';
--$151 million senior secured US Term Loan A due April 2020 at 'BB+/RR1';
--$500 million senior unsecured 6.75% notes due April 2020 at 'BB/RR4'.
The bank revolving credit facility, US Term Loan A, and the senior unsecured notes are guaranteed by domestic (mostly Delaware and Nevada) subsidiaries.
In addition, Fitch has assigned the following rating:
ACCO Brands Australia Holding Pty.
--$74 million (USD equivalent) AUD Term Loan A at 'BB+/RR1'.
The AUD Term Loan A is guaranteed by ACCO Brands Australia Holding Pty, a wholly owned subsidiary of ACCO Brands Corporation, and secured by substantially all assets of the subsidiary.
The Rating Outlook is Stable.
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and exclude restructuring charges. In 2015, Fitch added back $16 million in non-cash stock-based compensation to its EBITDA calculation. EBITDA is unadjusted for dividends received from associates or paid to minorities.
Applicable Criteria
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
https://www.fitchratings.com/site/re/885629
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1012485
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1012485
Endorsement Policy
https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
Copyright © 2016 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001.