Fitch Rates ACCO's $500MM Senior Unsec'd Notes & $1.020MM Bank Facility; Affirms IDR at 'BB'

NEW YORK--(BUSINESS WIRE)--

In conjunction with ACCO Brands Corporation's (ACCO) approximately $1.1 billion acquisition of MeadWestvaco Corporation's Consumer and Office Products business (Mead C&OP), the company obtained a $1.020 million credit agreement. The purchase price is comprised of approximately $675 million in ACCO shares and $460 in cash.

Fitch affirms the 'BB' IDR for ACCO and the ratings on existing debt as follows:

ACCO Brands Corporation

--Long-term Issuer Default Ratings (IDR) at 'BB';

--$425 million 10.625% senior secured notes due March 2015 at 'BB+';

--$175 million senior secured ABL facility due September 2013 at 'BB+';

--$246 million 7.625% subordinated notes due August 2015 at 'BB-';

In addition, Fitch assigns ratings to the new Credit Agreement Commitments with the following obligors as follows:

ACCO Brands Corporation

--$200 million US$ senior secured revolving credit commitment due 2017 at 'BB+';

--$50 million multicurrency senior secured revolving credit commitment due 2017 at 'BB+' (ACCO Brands Canada, Inc. is also an obligor under this facility);

--$95 million US$ senior secured Term Loan A Commitment due 2017 at 'BB+';

--$450 million US$ senior secured Term Loan B Commitment due 2019 at 'BB+'.

Monaco SpinCo, Inc.

--$190 million US$ secured Term Loan A commitment due 2017 at 'BB+';

--$500 million senior unsecured note due in 2020 at 'BB'.

ACCO Brands Canada, Inc.

--$35 million Canadian $ secured Term Loan A commitment due in 2017 at 'BB+'.

At Dec. 30, 2011, ACCO had $669 million of debt. The ratings of the existing facilities which encompass the $246 million subordinated debt, $425 million note and $175 million ABL are likely to be withdrawn on or near the acquisition closing date.

The new commitments can be terminated if the acquisition does not close by August 2012. Encompassed within the $1,020B bank facility are three term loans totaling $770 million and $250 million for two revolving credit facilities. The bank facilities will be secured by a first-priority lien on substantially all assets. They also have a maximum leverage covenant of 4.5 times (x) and a minimum interest covenant of 3x. Both become more restrictive over time. The transaction is expected to close during the second quarter after shareholder approval and other customary items. A shareholder meeting date is set for April 23, 2012.

Additionally, ACCO is issuing a 10-year, $500 million senior unsecured note with Monaco SpinCo Inc., a wholly owned subsidiary of ACCO as obligor. After the merger, the note will be guaranteed by ACCO and its subsidiaries with ACCO a co-issuer.

The proceeds of the $500 million notes along with $770 million in bank term loans will be used to fund the $460 million payment to MeadWestvaco Corporation, refinance the $425 million, 10.625% senior secured notes due March 2015, and redeem the $246 million, 7.625% senior subordinated notes due August 2015 along with related fees. On April 16, 2012, ACCO launched a cash tender offer and consent solicitation for the $425 million senior secured notes which will expire on May 11, 2012. Fitch expects to withdraw ratings on the asset-based lending facility loan facility (ABL) and would withdraw and/or reduce the amount of outstanding on the $425 million senior secured notes and the $246 million subordinated note depending on the tender and redemption.

Fitch had previously indicated in its press release of Jan. 30, 2012 that it expected to rate the company's proposed senior secured credit facilities 'BB+'. Fitch again affirms ACCO's 'BB' IDR and the 'BB+' rating on the senior secured facilities. The Outlook is Stable. The ratings and Outlook reflect Fitch's expectation that ACCO will successfully complete its merger with Mead C&OP. Mead C&OP is a leading provider of school, office and time management products in North America and Brazil. The combined entity will benefit from greater scale, a stronger business profile, increased profitability and greater cash flow.

Rating Rationale:

Fitch views the transaction as highly positive. The combined company is estimated to generate revenues in excess of $2 billion and EBITDA of approximately $300 million. ACCO estimates cost savings of $20 million annually by 2014. There is a minimal overlap in the companies' products mix and, more important, Mead C&OP has a larger presence in the consumer retail channel, which is complementary to ACCO's strength in the commercial channel. Another benefit of the merger is greater geographic diversification as the combined entity will generate 12% of its sales from Latin America and double ACCO's size in Canada. Mead C&OP's higher margins and lower operating earnings volatility reduces the business risk of the combined entities.

Fitch expects credit protection measures to improve following the merger. The strong profitability of Mead C&OP, the equity component of the purchase price and refinancing of ACCO's high-coupon senior secured notes will enhance the combined company's credit profile. Total debt to operating EBITDA is estimated to be approximately 3.7x and EBITDA to interest near 4.0x. The combined entity is estimated to be able to produce $100 million of free cash flow annually. If the transaction is not completed, Fitch will review the ratings to ensure they appropriately reflect the cash flow profile and business risk of ACCO on a standalone basis.

Ratings Drivers:

The office supply industry is in a slow secular decline, with revenues, operating earnings and cash flow highly correlated to the business cycle and corporate spending. Expenditures for office supply products fall during recessionary periods as these items are considered discretionary. ACCO experienced revenues declines of approximately 20% in 2008 and 2009 mainly attributed to the U.S. recession; however, the company was able to maintain EBITDA margins and even increase them in 2009.

In addition, laptop computers, digital pads and smart phones have diminished the need for certain paper-based products. Cash flow can be seasonal, and periodic heightened competition from private label products can exacerbate pressure on earnings and cash flows. Although the combined entity will have greater diversification it will be exposed to these elements, which place a limitation on the ratings to low investment grade.

ACCO's credit ratings are further limited by its position as a consolidator in the industry as this growth strategy may lead to periodic increases in its leverage. Current plans to reduce debt when the Mead C&OP transaction is executed will provide the company with greater financial flexibility to make future acquisitions. As a result, Fitch does not anticipate significant improvement in the company's credit measures beyond the near-to-intermediate term. Although ACCO is likely to seek accretive acquisitions and structure them with a minimal impact on its credit profile, such deals are at best opportunistic. As the company is focus on deploying FCF for growth, Fitch does not expect the firm to engage in either share repurchases or dividends as they would weaken its credit profile. However, a large debt financed acquisition without concrete measures to reduce debt meaningfully below 4.0x will likely lead to a negative rating action.

Recent Operating Performance and Credit Statistics:

In 2011 ACCO's sales increased 3% due to foreign exchange translation with volume declines of 2% offset by positive pricing of 2%. EBITDA and EBITDA margins were flat at $155 million and 11.7% respectively. Funds from operations adjusted leverage has been trending downward for a number of years to 5.1x in 2011 as the result of a combination of debt reduction and increased profits. Leverage will increase this year as the acquisition related debt is added without a full year of Mead C&OP's profit and cash flows. Free cash flow improved to $48 million from $41 million in 2010 given less working capital usage. Fitch expects marked improvement in free cash flow in 2013 when a full year of Mead C&OP's strong cash generation is added to ACCO's consolidated results.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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