(The following statement was released by the rating agency)
-- We expect continued deterioration in operating trends to cause U.S.-based school memorabilia company Visant Holding Corp.'s credit metrics to weaken further over the near term.
-- We are revising our 'B+' rating outlook to negative from stable.
-- The negative outlook reflects our expectation that weak economic conditions and changing student purchasing habits will cause continued pressure on revenue and EBITDA over the near term, likely limiting future deleveraging.
Rating Action On Oct. 5, 2012, Standard & Poor's Ratings Services revised its rating outlook on Armonk, N.Y.-based Visant Holding Corp. to negative from stable.
At the same time, we affirmed our 'B+' corporate credit rating on the company, along with all related issue-level ratings on the company's debt.
The outlook revision to negative reflects our expectation that Visant's ongoing unfavorable revenue trends will continue to pressure EBITDA and discretionary cash flow, drive leverage higher, and could weaken its interest coverage. We continue to assess Visant's business risk profile as "fair," based on our criteria, given the good market position and solid operating EBITDA margin compared with its principal competitor. We view its financial risk profile as "highly leveraged" because of its high debt level and an aggressive financial policy, demonstrated by a large, special dividend in 2010.
Visant publishes school yearbooks and manufactures and sells school class rings, together known as "school affinity products." The school affinity product market is a mature business with relatively high barriers to entry. Visant has a strong competitive position in this niche business because of its existing relationships with customers and strong product offerings. These strengths, along with effective cost management, result in Visant having an EBITDA margin higher than its key competitor. Offsetting these strengths is the fact that a major portion of Visant's revenues and EBITDA are seasonal and highly dependent on the North American academic cycle. Because of the discretionary nature of purchases, Visant's operations are vulnerable to weakness in the economy and gold price spikes, which together have caused consumers to shift to lower-priced metals for jewelry and affinity products and have pressured revenues of late.
Under our base-case scenario, we expect that for the remainder of 2012, revenue and EBITDA will decline at low- to mid-single-digit percentage rates, reflecting lower volumes resulting from continued weakness in consumer discretionary spending. This scenario incorporates the assumption that volumes will likely decline in the third quarter and that cost savings from plant consolidation of memory book facilities are likely to take longer than previously anticipated. In 2013, based on the current economic outlook, we have assumed current revenue flatness will likely persist. We expect the EBITDA margin to remain relatively flat or possibly decline modestly in 2013 based on product development costs that are partially offset by the consumer shift to nontraditional low-cost rings. Longer term, we see moderate growth trends in class rings revenue and EBITDA subject to economic conditions improvement and gold price pressure easing. In yearbooks, we see a risk that digital substitution could pressure yearbook sales.
For the second quarter ended June 30, 2012, Visant reported a year-over-year 6% decrease in revenues and 8% drop in operating income, slightly below our expectations. The performance reflected weak economic conditions, leading to lower graduation product sales and weak textbook sales. The EBITDA margin improved to 24.1%, compared with 23.1% in the prior-year period, and remains above its peers because of lower raw material costs. Over the past 12 months, Visant converted roughly 25.7% of EBITDA into discretionary cash flow, in line with our expectations; we expect discretionary cash flow to remain relatively flat until economic conditions improve.
Lease-adjusted debt to EBITDA was high, at 7x as of June 30, 2012, slightly higher than the same period last year and consistent with the 7x-and-higher leverage threshold that we associate with a highly leveraged financial risk profile. Higher leverage resulted from modestly lower EBITDA. Lease-adjusted EBITDA coverage of interest was 1.8x, in line with our expectations. We expect Visant's 2012 full-year debt leverage to remain in the low-7x area and interest coverage to remain in the high-1x area, based on our outlook for full-year EBITDA to be modestly lower. In 2013, we expect debt leverage to increase and interest coverage to weaken based on our base-case assumption of a modest EBITDA decline.
We believe Visant has "adequate" sources of liquidity (based on our criteria) to more than cover its needs over the next 12 to 18 months, even in the event of moderate unforeseen EBITDA declines. Our assessment of Visant's liquidity profile incorporates the following expectations and assumptions:
-- We expect sources of liquidity (including cash and facility availability) over the next 12 to 18 months to exceed uses by 1.2x or more.
-- We expect net sources would be positive, even with a 15% to 20% or larger drop in EBITDA over the next 12 months. Debt maturities over the next 12 months are minimal.
-- We believe Visant has the capacity to absorb high-impact, low-probability adversities.
-- We believe the company has a satisfactory standing in the credit markets.
Liquidity sources include cash balances of $63.8 million as of June 30, 2012, our expectation of 2012 positive discretionary cash flow between $80 million and $100 million, and $163.1 million availability under Visant's $175 million revolving credit facility. Uses of liquidity include modest working capital requirements and capital expenditures, which we expect to be about $50 million over the next 12 months. We do not expect Visant to make additional dividend payments and meaningful acquisitions over the next 12 months.
Visant's earliest maturity is the 2015 maturity of the revolver ($175 million), followed by the 2016 maturity of the term loan ($1.25 billion) and the 2017 maturity of the senior notes ($750 million). The company's credit facilities contain total leverage and interest coverage covenants. Visant had a 21% cushion against its total leverage covenant of 7.75x, on June 30, 2012, its tightest. We expect Visant to maintain adequate headroom against the covenants over the next 12 to 18 months, despite scheduled step-downs and a weak earnings outlook.
Recovery analysis For the complete recovery analysis, a report will be published as soon as possible after this report, on RatingsDirect.
Our rating outlook on Visant is negative, reflecting our view that credit metrics will continue to weaken over the near term. We could lower the rating if we become convinced that persistent EBITDA declines will lead to adjusted debt leverage above 7.25x on a sustained basis. We could also lower the rating if a structural demand shift becomes apparent that makes us less comfortable with the company's business prospects, and suggests further deterioration of credit measures.
We believe chances of an upgrade over the near term are remote, and would likely entail sustained lower leverage. An upgrade scenario would likely entail the company using excess cash largely for debt repayment. However, we believe management's aggressive financial policy could again lead to a leveraging transaction if business prospects improve. Therefore, without a firm commitment to establishing and maintaining leverage at or below 5.5x, we do not see a near-term upgrade scenario.
Related Criteria And Research
-- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Use Of CreditWatch And Outlooks, Sept. 14, 2009
-- Criteria Guidelines For Recovery Ratings, Aug. 10, 2009
-- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
-- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
-- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Ratings List Ratings Affirmed; Outlook Revision To From Visant Holding Corp. Corporate Credit Rating B+/Negative/-- B+/Stable/-- Ratings Affirmed Visant Holding Corp. Senior Unsecured B- Recovery Rating 6 Jostens Canada Ltd. Senior Secured BB- Recovery Rating 2 Visant Corp Senior Secured BB- Recovery Rating 2 Senior Unsecured B- Recovery Rating 6
(Caryn Trokie, New York Ratings Unit)