The Imagine Group LLC Rating Lowered To 'B-'; Debt Ratings Lowered; Outlook Stable

  • U.S.-based The Imagine Group LLC has produced lower-than-expected cash flows year to date relative to its debt burden due to higher–than-expected costs and working capital use. We expect free operating cash flow (FOCF) to debt to remain under 5% in the next 12 months.
  • We are lowering our issuer credit rating on Imagine to 'B-' from 'B', the issue-level rating on the first-lien credit facility to 'B-' from 'B', and issue-level rating on the second-lien term loan to 'CCC' from 'CCC+'. The recovery ratings are unchanged.
  • Our stable outlook reflects our expectation that FOCF to debt will remain at or below 5% over the next 12 months. We expect the company will continue to face significant competition, and ongoing restructuring costs will pressure EBITDA generation and cash flows despite modest revenue growth.
CHICAGO (S&P Global Ratings) Dec. 19, 2018—S&P Global Ratings today took the 
rating actions listed above. The downgrade reflects our expectation that the 
company's lower-than-expected operating performance over the past 18 months 
will continue, leading to FOCF to debt sustained below 5%, which we view as 
very low for a commercial printer. Specifically, due to high debt interest 
costs, poor working capital management, and client program delays, we expect 
FOCF for 2018 to be negligible and only slightly improve by 2019 year-end. 

Our stable outlook reflects our expectation that FOCF to debt will remain at 
or below 5% over the next 12 months. We expect the company will continue to 
face significant competition and ongoing restructuring costs will pressure 
EBITDA generation and cash flows despite modest revenue growth. We expect the 
company to maintain adequate liquidity to support its operations and fixed 
charges.

We could lower our issuer credit rating on Imagine if we expect the company to 
face liquidity pressure as a result of its inability to sustainably generate 
positive cash flows due to underperformance. This could result from poor 
revenue growth due to competitive pressures or overall economic challenges, 
declining EBITDA margins due to the company's inability to effectively cut 
costs and integrate acquisitions, and poor working capital management.

Strong operating performance such as the company achieving mid-single-digit 
percentage organic revenue growth and improving adjusted EBITDA margins above 
the high-teens percentage area are key drivers for an upgrade. These factors 
would allow the company to successfully lower leverage below the 6x area and 
improve FOCF to debt well above 5% on a sustained basis. We believe an upgrade 
is unlikely over the next 12 months.
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