(The following statement was released by the rating agency)
-- We expect continued deterioration in operating trends to causeU.S.-based school memorabilia company Visant Holding Corp.'s credit metrics toweaken further over the near term.
-- We are revising our 'B+' rating outlook to negative from stable.
-- The negative outlook reflects our expectation that weak economicconditions and changing student purchasing habits will cause continuedpressure on revenue and EBITDA over the near term, likely limiting futuredeleveraging.
Rating ActionOn Oct. 5, 2012, Standard & Poor's Ratings Services revised its rating outlookon 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'songoing unfavorable revenue trends will continue to pressure EBITDA anddiscretionary cash flow, drive leverage higher, and could weaken its interestcoverage. We continue to assess Visant's business risk profile as "fair,"based on our criteria, given the good market position and solid operatingEBITDA margin compared with its principal competitor. We view its financialrisk profile as "highly leveraged" because of its high debt level and anaggressive financial policy, demonstrated by a large, special dividend in 2010.
Visant publishes school yearbooks and manufactures and sells school classrings, together known as "school affinity products." The school affinityproduct market is a mature business with relatively high barriers to entry.Visant has a strong competitive position in this niche business because of itsexisting relationships with customers and strong product offerings. Thesestrengths, along with effective cost management, result in Visant having anEBITDA margin higher than its key competitor. Offsetting these strengths isthe fact that a major portion of Visant's revenues and EBITDA are seasonal andhighly dependent on the North American academic cycle. Because of thediscretionary nature of purchases, Visant's operations are vulnerable toweakness in the economy and gold price spikes, which together have causedconsumers to shift to lower-priced metals for jewelry and affinity productsand 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 consumerdiscretionary spending. This scenario incorporates the assumption that volumeswill likely decline in the third quarter and that cost savings from plantconsolidation of memory book facilities are likely to take longer thanpreviously anticipated. In 2013, based on the current economic outlook, wehave assumed current revenue flatness will likely persist. We expect theEBITDA margin to remain relatively flat or possibly decline modestly in 2013based on product development costs that are partially offset by the consumershift to nontraditional low-cost rings. Longer term, we see moderate growthtrends in class rings revenue and EBITDA subject to economic conditionsimprovement and gold price pressure easing. In yearbooks, we see a risk thatdigital substitution could pressure yearbook sales.
For the second quarter ended June 30, 2012, Visant reported a year-over-year6% decrease in revenues and 8% drop in operating income, slightly below ourexpectations. The performance reflected weak economic conditions, leading tolower graduation product sales and weak textbook sales. The EBITDA marginimproved to 24.1%, compared with 23.1% in the prior-year period, and remainsabove 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 linewith our expectations; we expect discretionary cash flow to remain relativelyflat until economic conditions improve.
Lease-adjusted debt to EBITDA was high, at 7x as of June 30, 2012, slightlyhigher than the same period last year and consistent with the 7x-and-higherleverage threshold that we associate with a highly leveraged financial riskprofile. Higher leverage resulted from modestly lower EBITDA. Lease-adjustedEBITDA coverage of interest was 1.8x, in line with our expectations. We expectVisant's 2012 full-year debt leverage to remain in the low-7x area andinterest coverage to remain in the high-1x area, based on our outlook forfull-year EBITDA to be modestly lower. In 2013, we expect debt leverage toincrease and interest coverage to weaken based on our base-case assumption ofa 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 eventof moderate unforeseen EBITDA declines. Our assessment of Visant's liquidityprofile incorporates the following expectations and assumptions:
-- We expect sources of liquidity (including cash and facilityavailability) 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% orlarger drop in EBITDA over the next 12 months. Debt maturities over the next12 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 creditmarkets.
Liquidity sources include cash balances of $63.8 million as of June 30, 2012,our expectation of 2012 positive discretionary cash flow between $80 millionand $100 million, and $163.1 million availability under Visant's $175 millionrevolving credit facility. Uses of liquidity include modest working capitalrequirements and capital expenditures, which we expect to be about $50 millionover the next 12 months. We do not expect Visant to make additional dividendpayments and meaningful acquisitions over the next 12 months.
Visant's earliest maturity is the 2015 maturity of the revolver ($175million), followed by the 2016 maturity of the term loan ($1.25 billion) andthe 2017 maturity of the senior notes ($750 million). The company's creditfacilities contain total leverage and interest coverage covenants. Visant hada 21% cushion against its total leverage covenant of 7.75x, on June 30, 2012,its tightest. We expect Visant to maintain adequate headroom against thecovenants over the next 12 to 18 months, despite scheduled step-downs and aweak earnings outlook.
Recovery analysisFor the complete recovery analysis, a report will be published as soon aspossible after this report, on RatingsDirect.
Our rating outlook on Visant is negative, reflecting our view that creditmetrics will continue to weaken over the near term. We could lower the ratingif we become convinced that persistent EBITDA declines will lead to adjusteddebt leverage above 7.25x on a sustained basis. We could also lower the ratingif a structural demand shift becomes apparent that makes us less comfortablewith the company's business prospects, and suggests further deterioration ofcredit measures.
We believe chances of an upgrade over the near term are remote, and wouldlikely entail sustained lower leverage. An upgrade scenario would likelyentail the company using excess cash largely for debt repayment. However, webelieve management's aggressive financial policy could again lead to aleveraging transaction if business prospects improve. Therefore, without afirm commitment to establishing and maintaining leverage at or below 5.5x, wedo 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-GradeCredits, 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 ListRatings Affirmed; Outlook RevisionTo FromVisant Holding Corp.Corporate Credit Rating B+/Negative/-- B+/Stable/--Ratings AffirmedVisant Holding Corp.Senior Unsecured B-Recovery Rating 6Jostens Canada Ltd.Senior Secured BB-Recovery Rating 2Visant CorpSenior Secured BB-Recovery Rating 2Senior Unsecured B-Recovery Rating 6
(Caryn Trokie, New York Ratings Unit)