Harland Clarke Holdings Corp. Rating Lowered To 'B-' On Declining Cash Flow At Valassis And Increased Refinancing Risk


  • U.S.-based payment solution and marketing services provider Harland Clarke Holdings Corp. (HCHC) underperformed our expectations in 2018 due to a double-digit EBTIDA decline in its Valassis' shared mail business. As a result, the company faces elevated refinancing risks in 2020 because $275 million of senior secured notes are due March 2020 and the maturity on the $1.664 (outstanding) billion senior secured term loan springs forward to November 2020 if its $708.5 million 9.25% senior unsecured notes are still outstanding at that time. Leverage increased to 6.3x in 2018 from 5.6x in 2017, and we expect it will remain above 6x in 2019.
  • We are lowering our issuer credit rating on Harland to 'B-' from 'B'. The outlook is stable. We are also lowering our issue-level ratings on the company's senior secured debt to 'B' from 'B+' and on its senior unsecured notes to 'CCC' from 'CCC+'. The recovery ratings remain unchanged.
  • The stable outlook reflects our expectation that leverage will remain above 6x in 2019 despite the company stabilizing its operating performance at Valassis and modestly improving its cash flow generation due to tax repayments from its sponsor and the reduction of nonrecurring costs. We believe HCHC will be able to meet its March 2020 debt maturities from these sources.
NEW YORK (S&P Global Ratings) April 22, 2019—S&P Global Ratings today took the rating actions listed above. The downgrade reflects the company's continued weak operating performance and secular challenges facing print advertising within the Valassis segment (about 40% of EBITDA of the company). We now expect leverage to remain above 6x in 2019. In addition, the weaker operating performance elevates the refinancing risks the company faces from its upcoming maturities in 2020.
The stable outlook reflects our expectation that leverage will remain above 6x in 2019 despite the company stabilizing its operating performance at Valassis and modestly improving its cash flow generation due to tax repayments from its sponsor and the reduction of nonrecurring costs. We believe HCHC will be able to meet its March 2020 debt maturities from these sources.
We could lower our ratings before the end of 2019 if operating performance does not continue to improve as expected at Valassis. In addition, we could take a negative rating action if the company does not demonstrate progress in undertaking a viable refinancing plan by the end of 2019 to address the remaining refinancing risk due to its November 2020 springing maturity. This could occur in a scenario in which HCHC's operating performance weakens, with volumes in the shared mail business declining in the mid-single-digit area and operating cash flow not improving as expected, thereby reducing the company's liquidity.
Although unlikely until HCHC addresses its remaining refinancing risk, we could raise the rating if the company reduces leverage below 6x on a sustained basis while generating FOCF to debt above 5%. A positive rating action would likely be accompanied by stabilization at Valassis and a return to organic revenue and EBITDA growth, as well as a viable refinancing plan that addresses its 2020 maturities.
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