R.R. Donnelley has $1.3 billion of liquidity, aims for 2.25-to-2.75 times leverage target

By Paul Deckelman

New York, Dec. 3 - R.R. Donnelley & Sons Co. is aiming to bring its leverage levels down, helped by what the Chicago-based commercial printer and communications solutions company's chief financial officer termed its "strong" cash-flow generation capacity.

And CFO Daniel N. Leib, who also serves as the company's executive vice president, said that Donnelley's efforts will be helped by its planned acquisition of sector peer Consolidated Graphics Inc., a deal that he said would be de-leveraging on a pro-forma basis following its expected closing in the 2014 first quarter. The acquisition will also be accretive to earnings within 12 months.

Leib told participants at the Bank of America Merrill Lynch Leveraged Finance Conference in Boca Raton, Fla. on Tuesday that the company did go to the market to pre-fund the acquisition - it drew on its revolving credit line and then did a $350 million junk bond deal last month and used the proceeds from the latter transaction for general corporate purposes, including repayment of revolver borrowings. He said that would likely result in increased fourth-quarter interest costs.

However, Donnelley also used some of its cash on hand for the deal, and the consideration included an equity component as well, thus holding down the amount of funds that had to be borrowed. The deal, announced Oct. 24, is valued at about $620 million in cash and shares, plus the assumption of Consolidated's net debt by Donnelley.

No large near maturities

As of the end of the third quarter on Sept. 30, Donnelley's books showed about $3.85 billion of debt maturing between now and 2024, but Leib said that "we've done a fair amount of work on the capital structure," praising the staff for having done a "nice job of doing some issuances and some tenders."

For instance, the company sold $400 million of 7% senior notes due 2022 over the summer in a quick-to-market deal that priced at par on Aug. 12 after having been upsized from an originally announced $350 million. Donnelley used the deal proceeds, together with a draw on its revolver, to partially fund the tender offers for up to $350 million of then-outstanding debt, including its 5½% notes due 2015, its 6 1/8% notes due 2017 and its 7¼% notes due 2018.

That was one of a trio of deals the company did in Junkbondland this year. It also sold a quickly shopped $450 million of 7 7/8% senior notes due 2021, pricing those bonds at 99½ on Feb. 28, 2013 to yield 7.961% and using the proceeds to partially fund tender offers for its 8.6% notes due 2016 as well as the 6 1/8% notes due 2017 and 7¼% notes due 2018.

And it drove by the market on Nov. 6 with $350 million of 6½% senior notes due 2023, which it priced at par.

"We have been active in managing the profile, obviously," Leib said. As a result, he pointed out that "we have no significant debt maturities until 2019." According to slides prepared for use with Leib's presentation at the conference, the company has no debt maturing for the remainder of this year, and $258 million coming due in April of 2014.

After that, amounts of maturing debt are moderate for the following few years: $200 million in 2015, $218 million in 2016, $251 million in 2017 and $350 million in 2018. Only in 2019 does it really face a "wall of maturities" - a total of $622 million followed by $400 million in 2020, $529 million of 2021 debt, including the bonds sold back in February, the $400 million of 2022 bonds sold in August and the $350 million of 2023 notes sold in November.

Leverage goal is 'guard rail'

As of Sept. 30, the company's liquidity stood at nearly $1.3 billion, including $463 million of cash, although Leib said that three-quarters of that was being held at Donnelley's overseas subsidiaries, and the remainder in availability under the $1.15 billion senior secured five-year revolver that the company entered into in October 2012, reduced by some $330 million due to various covenant stipulations. As of Nov. 5 - the day before its most recent bond deal - the company had $150 million borrowed under the revolver, although the game plan was to do the bond deal and then repay those borrowings.

Leib said that in September the company's leverage ratio of gross debt as a multiple of EBITDA stood at 3 times, but he said that the company's aim is to bring that down to a target level somewhere in a range between 2.25 times and 2.75 times.

During the question-and-answer portion of the proceedings that followed his formal presentation, Leib declined to be too specific as to when Donnelley expects to get the debt ratio down to its desired range, stating that "we haven't time-dimensionalized it."

He declared that "we are often asked why it is not 2.0 to 2.5 times or something different. I will tell you that our desire is to move down from the top end of the range. We're not at the top of the range yet, so once we start to get into the range and once we start to move down the range, that would be a more appropriate time to look at alternative targets.

One questioner asked whether Donnelly - which currently has no secured term loan debt - might consider tapping that particular market for any of its upcoming capital needs.

Leib replied that the company has so far "been using our same indenture that has existed."

He said that "there are no plans to be in the market today, so I wouldn't want to address where we would end up looking at the different areas of the market. We feel right now - particularly given the strong free cash flow we have right now, given the way the maturity profile is built out over time - that we'll have plenty of avenues and liquidity sources."

Asked whether the company will be back in the market for more deals similar to the ones it did earlier this year, funding tender offers for existing bonds using the proceeds from a new deal - especially since, as one of the questioners noted, "your higher-cost debt is call-protected - the CFO said that "we'll continue to look at market opportunities, depending where the market is."

Leib noted that "we've done the transaction now probably four or five times where we've done issuances and simultaneous tenders. At times, the issues have been smaller than the tenders. And so [it is] a way to create some short-term debt for us to pay down with the free cash flow."

However, repeating a phrase that he had used several times during his presentation, he reiterated that "the 'guard-rails' of our capital deployment are the 2.25-to 2.75-times" leverage target.

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