When I last checked on the price and yield of ARC’s publicly-traded 10.5% (coupon-rate) Notes, which was on November 16, 2011, I found that the Notes were trading at 110.194 (or in other words, trading at a premium), and, if that quote was accurate, that means that your yield (if you paid the premium) would be less than the 10.5% coupon rate. Heck, I must be clueless about notes because I thought that when the actual yield goes lower than the coupon rate, that means that the notes are less risky, not more risky! WTF?
Anyway, one of my blog readers directed me to read the following:
Rating Action: Moody's changes American Reprographics' ratings outlook to negative
Global Credit Research - 09 Dec 2011
Approximately $200 million of long-term debt affected
New York, December 09, 2011 -- Moody's Investors Service changed American Reprographics Company's ("ARC") ratings outlook to negative from stable. Concurrently, Moody's affirmed the company's B1 corporate family and probability of default ratings, and the B1 rating on the $200 million senior unsecured notes due 2016. Moody's also assigned an SGL-3 speculative grade liquidity rating.
Corporate family rating at B1;
Probability of default rating at B1;
$200 million 10.5% senior unsecured notes due 2016 at B1 (LGD4, 59%). Point estimate revised from (LGD4, 55%).
Speculative grade liquidity rating at SGL-3.
The outlook revision reflects that ARC's operating performance has been weaker than Moody's expectation since the corporate family rating was lowered to B1 from Ba3 in November 2010. The outlook revision also reflects Moody's concern over the company's ability to improve its revenue/earnings, and thus credit metrics, given ongoing weakness in the commercial construction market. Debt to EBITDA climbed to 4.6 times (including Moody's standard analytical adjustments) for the twelve months ended September 30, 2011 from 4.2 times as of 2010 year-end. EBITDA less capex to interest declined to 1.4 times from 2.1 times over the same period. While there are signs of stabilization in performance, revenue and EBITDA declines continue.
ARC's B1 corporate family rating reflects its high leverage, modest interest coverage, exposure to commercial and residential construction end-markets that are both in a downturn, the generally cyclical nature of these industries, and significant regional concentration in California. However, the rating is also supported by the company's leading position as a provider of document management services, significant scale relative to its competitors, and the diversity of its customer base. The rating also derives support from growth in facilities management revenues (particularly managed print services) that has partially offset declines in reprographics services revenues, and expectations for continued positive free cash flow generation.
The SGL-3 speculative rating reflects Moody's expectation that ARC will maintain an adequate liquidity profile over the next twelve months, supported by positive free cash flow and available capacity under its $50 million secured revolving credit facility, though offset by limited cushion under the financial covenants governing the credit agreement.
ARC's ratings could be downgraded if its revenue and earnings continue to deteriorate such that debt to EBITDA exceeds 5.0 times and/or EBITDA less capex to interest expense weakens from current levels of 1.4 times. A material weakening of the company's liquidity profile, including increased revolving credit facility usage can also pressure the ratings.
Moody's could revise the ratings outlook to stable if an expansion in residential and commercial construction activity translates into sustained improvements in ARC's operating performance such that debt to EBITDA is reduced and sustained below 4.5 times and EBITDA less capex to interest is above 1.5 times.
The principal methodology used in rating American Reprographics Company was the Global Business & Consumer Services Industry Methodology published in October 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.
Headquartered in Walnut Creek, California, American Reprographics Company is a leading reprographics service company in the U.S. The company reported revenues of approximately $426 million for the twelve-months ended September 30, 2011.
Although this credit rating has been issued in a non-EU country which has not been recognized as endorsable at this date, this credit rating is deemed "EU qualified by extension" and may still be used by financial institutions for regulatory purposes until 31 January 2012. ESMA may extend the use of credit ratings for regulatory purposes in the European Community for three additional months, until 30 April 2012, if ESMA decides that exceptional circumstances arise that may imply potential market disruption or financial instability. Further information on the EU endorsement status and on the Moody's office that has issued a particular Credit Rating is available on www.moodys.com.
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Daniel Marx Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653
Alexandra S. Parker MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653
Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653