S&P: Donnelley Financial Solutions Inc. Assigned 'BB-' Rating; Outlook Stable; New Debt Rated
Simultaneously, we assigned our 'BB+' issue-level rating and '1' recovery rating to the company's $300 million secured revolving credit facility due 2021 and $350 million term loan due 2023. The '1' recovery rating indicates our expectation for very high (90%-100%) recovery of principal in the event of a payment default.
We also assigned our 'B' issue-level rating and '6' recovery rating to the company's $300 million senior notes due 2024. The '6' recovery rating indicates our expectation for negligible (0%-10%) recovery of principal in the event of a payment default.
"The 'BB-' corporate credit rating reflects DFS' niche market position in the financial information communications services industry, its good brand recognition and client relationships, technology capabilities, and its adjusted leverage, pro forma for its spin-off transaction, forecast of 3.7x in 2016" said S&P Global Ratings' credit analyst Minesh Patel.
The stable rating outlook reflects our expectation that DFS' adjusted debt leverage will remain in the 3x-4x range over the next few years, its adjusted EBITDA margins will be in the 20% area, and its operating performance will not decline following its spin-off transaction.
We could lower our corporate credit rating on DFS if the company's operating performance declines after the spin-off transaction or if volatility in the capital markets leads to lower-than-expected revenue, resulting in EBITDA margins declining to the mid-teens percentage area or sustained debt leverage above 4x. We could also consider a downgrade if the company initiates any shareholder-rewarding programs or pursues a large acquisition that changes our view of the company's financial policy.
Although unlikely over the next 12 months, we could raise the rating if the company improves the diversity of its revenue sources, if it decreases the percentage of revenue generated from its print solutions and increases the percentage of recurring revenue, and if we expect it to maintain adjusted leverage below 3x.