Moody's ups Merrill first-lien loans to Ba3, rates second-lien loan B3

Moody's Investors Service said it affirmed Merrill Corp.'s B1 corporate family rating and upgraded the probability-of-default rating to B1 from B2.

The agency also assigned a B3 rating with a loss-given-default assessment of LGD5 (85%) to Merrill Communications, LLC's proposed senior secured second-lien term loan and upgraded the senior secured first-lien bank credit facility to Ba3 (LGD3, 35%) from B1.

Proceeds from the proposed second-lien term loan will be used to fund a shareholder dividend.

The transaction increases debt and creates no additional value for lenders, but Moody's said the B1 corporate family rating can sustain the approximately one turn increase in leverage given expectations for continued positive free cash flow. Merrill intends to apply $50 million of the term loan to redeem its preferred stock, which Moody's considered debt, resulting in an approximately $150 million net increase in debt. Pro forma for the transaction, the agency's estimates put Merrill's leverage at slightly over 6x debt to EBITDA, an increase from 5.2 times at July 31.

The agency said the B1 corporate family rating incorporates high financial risk, strategic risk as Merrill continues to transform its business model and remaining (albeit reduced) sensitivity to the capital markets cycle and the decline in printed material.

A track record of positive free cash flow, improved diversification, a diverse customer base, and the considerable stream of recurring and contractual revenue support the ratings, Moody's said.

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