Reprographics 101

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.

Ratings affirmed:

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%).

Rating assigned:

Speculative grade liquidity rating at SGL-3.

RATINGS RATIONALE

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 http://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.

REGULATORY DISCLOSURES

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 http://www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides relevant regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on http://www.moodys.com.

Information sources used to prepare the rating are the following : parties involved in the ratings, public information, confidential and proprietary Moody’s Investors Service information, and confidential and proprietary Moody’s Analytics information.

Moody’s considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody’s adopts all necessary measures so that the information it uses in assigning a rating is of sufficient quality and from sources Moody’s considers to be reliable including, when appropriate, independent third-party sources. However, Moody’s is not an auditor and cannot in every instance independently verify or validate information received in the rating process.

Please see the ratings disclosure page on http://www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on http://www.moodys.com for information on (A) MCO’s major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody’s Corporation; however, Moody’s has not independently verified this matter.

Please see Moody’s Rating Symbols and Definitions on the Rating Process page on http://www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on http://www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody’s ratings were fully digitized and accurate data may not be available. Consequently, Moody’s provides a date that it believes is the most reliable and accurate based on the information that is available to it. Please see the ratings disclosure page on our website http://www.moodys.com for further information.

Please see http://www.moodys.com for any updates on changes to the lead rating analyst and to the Moody’s legal entity that has issued the rating.

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