Lexmark International Downgraded To 'CCC' From 'B-'; Parent Rated 'CCC'; Outlook Negative

  • U.S.-based printer solutions provider Lexmark International Inc. (Lexmark) faces rising loan amortization payments in 2019 and its $341 million principal amount of secured senior notes maturity in 2020 that will put its liquidity at risk.
  • We are lowering all of our ratings on Lexmark, including our issuer credit rating to 'CCC' from 'B-'.
  • To establish our issuer credit rating at the audited entity, we also assigned our 'CCC' issuer credit rating to Lexmark International II LLC, which is the parent of Lexmark (the borrower under the credit agreement).
  • The negative outlook reflects our expectation that Lexmark is vulnerable to nonpayment and is dependent on favorable financial and economic conditions to meet its financial obligations over the next 12 months.
NEW YORK (S&P Global Ratings) April 16, 2019—S&P Global Ratings today took the rating actions listed above. The downgrade reflects S&P Global Ratings' view that Lexmark might not be able to meet its financial obligations over the next 12 months absent favorable business and financial conditions. As of Dec. 31, 2018, Lexmark had pro forma cash balances of about $298 million. We forecast adjusted free operating cash flow (FOCF) generation of $75 million to $80 million in 2019 and $120 million to $130 million in 2020; we also forecast negative FOCF after debt service, although the company has a cash buffer to absorb its $100 million revolver maturity in November 2019. The company disclosed that it is discussing refinancing options with its shareholders, and lenders, but a timely refinancing at favorable rates to the company has not been determined. The company might not be able to meet its debt maturities without refinancing. We could consider an upgrade if Lexmark adequately addresses the looming maturities and higher amortization payments in future years.
The negative outlook reflects Lexmark's increasing refinancing needs within 12 months and the likelihood the company will not be able to meet its 2020 maturity without a refinancing. We expect highly competitive and mature market conditions, limited industry growth prospects, and recent management turnover will diminish Lexmark's operational flexibility.
We could lower the rating if we believe a debt restructuring is inevitable within six months due to the company's inability to address upcoming debt maturities and mandatory debt amortization payments.
We could consider an upgrade if the company refinances its $341 million senior notes due March 2020 over the coming months or receives shareholder and lender support to meet rising debt amortization and support the business. Longer term, we could raise the rating to 'B-' if the company sustains recent operational improvements that support strong FOCF generation such that it is positive after debt amortization payments; or if the company alleviates the debt payment step-up through a global refinancing of its capital structure.
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