(The following statement was released by the rating agency) Fitch Ratings-New York-April 06: Fitch Ratings has affirmed the Long-Term Issuer Default Rating (IDR) of ACCO Brands Corporation (ACCO) at 'BB'. The Rating Outlook is Stable. ACCO's ratings reflect the company's consistent FCF and reasonable gross leverage around 3x gross debt to EBITDA. The ratings are constrained by secular challenges in the office products industry and channel shifts within the company's customer mix, as well as the risk of further debt-financed acquisitions into faster-growing geographies and product categories. The company has taken actions over the last few years to manage costs given pressures on U.S. organic growth and has executed well on diversifying its customer base toward higher growth channels, as well as international markets. Given the near term coronavirus pandemic and expectations of a medium term economic downturn, Fitch expects EBITDA to decline to the $200 million-$250 million range in 2020, down from $290 million in 2019, absent further acquisitions and a prolonged and/or deeper period of major business disruption from the coronavirus pandemic. Despite near-term pressures, Fitch expects FCF after dividends of at least $75 million annually. Key Rating Drivers Limited Organic Industry Growth: The office products industry is experiencing a slow secular decline in mature markets due to a shift toward digital technologies, partially offset by growth in emerging markets. Growth in private label penetration has further pressured sales of branded products in many categories. In addition, ACCO is managing a continued shift in channel revenue away from traditional office product retailers, such as office super stores (OSS), e.g., Staples and Office Depot, and traditional office supply wholesalers. Growth of sales to discounters (e.g., Walmart (NYSE:WMT) and Target (NYSE:TGT) in the U.S.), e-tailers, and the independent channel has required ACCO to optimize channel management to maintain share. Within the stationery and office products industry, ACCO is also subject to competition from retailers and e-commerce companies that import products directly from foreign sources and resell under their own private brands, typically at lower price points. While ACCO benefits from its market-leading position, the company has not been immune to secular industry pressures. ACCO's U.S. revenue (43.0% of net revenue in 2019) declined 1.6% on five-year CAGR basis from 2014-2019. Fitch expects this trend to continue going forward, irrespective of near-term trends around the coronavirus pandemic. As a result of international acquisitions, ACCO's percentage of total revenue derived from outside the U.S. increased to 57% in 2019 compared with 40% in 2015. ACCO's top 10 customers accounted for 42% of total revenue in 2019 compared with 56% in 2016, with the merged Staples (office supply superstore retailer) and Essendant (office products distributor) entity in the U.S. accounting for approximately 10% of the consolidated total. Fitch expects this relationship to decrease in relative importance going forward as ACCO focuses on serving higher-margin independent retailers (which tend to focus on ACCO's more premium products) as well as the faster-growing mass and online retailers. North America Profitability Pressures: In 2019, North American operations (the U.S. and Canada) contributed 49.0% of ACCO's operating profit before corporate expense, with segment margins of 13.5% above the corporate average of 12.2% (before unallocated corporate expense). Sales and operating profit in ACCO's core North American business declined at compound average annual rates of 1.5% and 3.6%, respectively, over the 2015-2019 period. ACCO was able to take price in advance of tariff implementation in 2019, while moving production of paper supplies to Vietnam from China, avoiding tariffs and helping to drive 110 bps of segment operating margin improvement in 2019. Acquisitions Drive Growth and Diversification: ACCO intends to strengthen its leadership position in the industry, which is consolidating due to strong competition and declining organic growth prospects. Fitch expects the company to focus on accretive acquisitions to increase exposure to higher growth markets and diversify its business with respect to customers and geographic regions served. Demand for school supplies continues to grow worldwide, with a shift to premium offerings that has allowed ACCO to gain share. The company has offset declines in its core businesses through periodic strategic acquisitions to broaden its geographic reach. In August 2019, ACCO acquired Foroni, a Brazilian manufacturer and marketer of notebooks and other paper products for schools and offices, for $42 million plus the assumption of $8 million of debt. In July 2018, ACCO purchased GOBA, a producer of school and craft products sold under the Barrilito brand in Mexico, for $37 million. These transactions were financed with cash on hand. In February 2017, ACCO acquired Esselte, a predominantly European-focused seller of office machines and organizational products, for $333 million. Annual cost savings from this acquisition exceeded $30 million and this business line contributed $50 million of incremental FCF (of the consolidated total of $147 million) in 2019. In May 2016, ACCO closed the acquisition of the remaining 50% of Pelikan Artline Pty Limited, its joint venture company serving the Australian and New Zealand markets, as well as a buyout of a minority interest in a subsidiary of the joint venture. Prior to the closing of the transaction, the business operated independently from ACCO's existing Australian business. The cash purchase price was $103.8 million. The acquisitions contributed to ACCO's revenue growth, margin expansion due to greater scale and improved geographic and customer diversity. While ACCO's acquisitions in Europe, Latin America, and Australia have reduced North America's relative importance, these regions operate with lower margins. On a consolidated basis, Fitch therefore expects continued secular pressure on corporate operating margins from a mix shift to less profitable regional businesses in the EMEA and International segments. Overall, ACCO has maintained EBITDA in the $250 million-$300 million range over the past two years, as acquisitions have offset declines in the company's base business. Strong Expense Management: ACCO maintains a tight focus on its cost structure, which has enabled the company to improve profitability in a difficult operating environment experiencing limited organic growth, particularly in mature markets. In the U.S., the company continues to reallocate sales efforts to higher-margin independent retailers (who tend to sell higher price-point, higher-margin products but have a higher cost to serve as well) away from the declining, lower-margin office superstore channel. The company exited unprofitable businesses in China and substantially completed its restructuring program in 2019. Lastly, the company decreased management incentive compensation to approximately $11 million-$12 million in 2018 (a $19.8 million reduction); incentive compensation rose in 2019 on better financial results last year. Disruption from Coronavirus: Fitch expects a significant decline in demand for office supplies for in 2020 due to office closures, partially offset by consumer purchases of consumable and semidurable office supplies. Over the rating case horizon, Fitch notes that ACCO's leverage, as measured by total debt to EBITDA, is expected to remain in or below mid-3x, within rating sensitivities at less than 4x. ACCO manages to 2.5x net debt to EBITDA and has historically applied a meaningful portion of FCF after dividends, which Fitch projects at $75 million to $125 million annually, toward debt reduction. Derivation Summary ACCO is the only pure-play, public office supply company in Fitch's coverage universe. ACCO's IDR of 'BB' reflects the company's leverage around 3.0x gross debt to EBITDA. The ratings are constrained by secular challenges in the office products industry in North America, Europe, and Australia. The company has taken steps over the last few years to manage costs given pressures on U.S. organic growth and has executed well on diversifying its customer base toward higher growth, higher-margin channels in North America as well as acquisitions in international markets. This has led to EBITDA in the $250 million-$300 million range and FCF generation of $100 million-$150 million annually over the 2016-2019 period. Hasbro (NASDAQ:HAS)'s 'BBB-' ratings reflect the company's elevated leverage profile following the acquisition of Entertainment One Ltd. (eOne) for $4 billion plus transaction expenses. At YE 2019, pro forma gross debt/EBITDA was approximately 4.7x and is expected to trend to the mid-3x range within 24 months post acquisition close on synergy achievement. The Negative Outlook reflects concerns that gross debt/EBITDA could be sustained above 3.5x; and therefore, ratings could be stabilized with greater confidence that a combination of good organic growth, synergy achievement and debt reduction could yield gross debt/EBITDA below 3.5x, as appropriate for the 'BBB-' rating. Spectrum's 'BB' IDR reflects the company's diversified portfolio across products and categories, strong brand portfolio, financial discipline as evidenced by its public commitment to maintain net leverage (net debt/EBITDA) at or below 3.5x over the long term, expectations for stable to low-single-digit organic revenue growth, solid profitability with EBITDA margin of approximately 15% pro forma for the divestitures of the Global Batteries and Global Autocare divisions and historically consistent FCF. These positive factors are offset by strong competition, profit margin pressures across three of its four core segments, the company's acquisitive nature historically and potentially greater overall business cyclicality due to the increased contribution of Hardware and Home Improvement to total company EBITDA post divestitures. Mattel (NASDAQ:MAT)'s 'B-' IDR reflects execution risk in stabilizing revenue and growing EBITDA from depressed levels. Mattel continues to face revenue pressures at Fisher-Price, Thomas and Friends and American Girl, which collectively generated approximately $1.4 billion or around 30% of total gross revenue in 2019. EBITDA in 2019 was approximately $450 million, up materially from 2017-2018 but around half of the $900 million range reported as recently as 2015-2016. FCF turned materially negative in 2016 and continued EBITDA declines led gross leverage (debt/EBITDA) to peak around 11x in 2017-2018. The Positive Outlook reflects increasing confidence that Mattel's cost reduction program and sales initiatives could yield stabilizing topline results and EBITDA improving above $500 million, at which point Mattel could generate sustainably positive FCF as cash restructuring expenses subside. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer --Revenues decline 10% in 2020 (2Q20 -24%) due to the coronavirus pandemic and Fitch's assumptions around a related economic downturn, recover2%-3% in 2021, then resume their prior trend of flat to down 1%, absent any acquisitions.. --EBITDA margin declines to approximately 12.8% in 2020 from 14.9% in 2019, then remains stable thereafter, with the negative effect of revenue declines and negative country mix on margin roughly balanced by continued expense management. EBITDA could therefore trend around $225 million beginning 2020, compared with nearly $300 million in 2019. --FCF after dividends of $75 million-$125 million could be used for share repurchase and debt reduction. --Leverage, as measured by gross debt to EBITDA, rises to the mid-3x range in 2020 on the coronavirus pandemic, then trends towards the low 3x range over time, assuming some debt reduction. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: --An upgrade beyond 'BB' is possible if the company makes favorable acquisitions that change its business mix towards less cyclical or higher growth prospects while maintaining total debt/EBITDA below 3x. However, an upgrade is not anticipated in the near term given existing business model and industry issues. Factors that could, individually or collectively, lead to negative rating action/downgrade: --Sustained gross leverage at or above 4x, generating annual FCF of less than $25 million, or a large debt-financed acquisition without a concrete plan to reduce leverage to 4x in a 24-month time frame could lead to a negative rating action. --An acceleration of revenue declines in North America. Best/Worst Case Rating Scenario Ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Adequate Liquidity: Liquidity is ample, and is supported by the company's consistent FCF generation, though seasonally skewed to the second half of the year. As of Dec. 31, 2019, ACCO had $28.0 million of cash on hand and $566.6 million of revolver availability, net of $11.2 million outstanding letters of credit and $22.2 million of revolver borrowings. On May 23, 2019, ACCO entered into a second amendment to its credit agreement, which increased revolver commitments by $100 million to $600 million to allow greater availability for acquisitions, stock repurchases and redemption of higher yielding unsecured debt. The facility also includes a new $100 million term loan. These facilities mature on May 23, 2024. ACCO had $810.4 million of debt outstanding on the balance sheet as of Dec. 31, 2019, consisting of a $275.9 million Euro Senior Secured Term Loan A, $97.5 million outstanding on the USD Senior Secured Term Loan A, $41.6 million under Australian Dollar Senior Secured Term Loan A and $22.2 million of revolver borrowings (all of which mature in May 2024), and $375 million of unsecured notes due in December of 2024. Financial covenants include maintenance of funded indebtedness (net of cash) to EBITDA less than 3.75x (increasing to 4.25x for up to three quarters following an acquisition) and interest coverage (EBITDA divided by interest expense) greater than 3.0x. Debt maturities are manageable at less than $35 million of annual amortization over the 2020 through 2023 period based on YE 2019 outstanding debt. ACCO manages to 2.5x net debt to EBITDA and has historically applied a portion of FCF toward debt reduction, which Fitch expects will continue. The company initiated its first quarterly dividend of $0.06 per share in 1Q18 and currently pays $0.065 quarterly ($0.26 on an annual basis) or $25 million per year. Historically, the company has repurchased approximately $75 million of shares annually. Cessation of both of these activities (e.g., in a period of financial distress) would result in $100 million of incremental FCF. Recovery Considerations Fitch has assigned Recovery Ratings (RRs) to the various debt tranches in accordance with Fitch criteria, which allows for the assignment of RRs for issuers with IDRs in the 'BB' category. Given the distance to default, RRs in the 'BB' category are not computed by bespoke analysis. Instead, they serve as a label to reflect an estimate of the risk of these instruments relative to other instruments in the entity's capital structure. Fitch rates ACCO's first-lien secured debt one notch above the IDR, reflecting outstanding recovery prospects (91%-100%) given default (RR1). Unsecured debt will typically achieve average recovery, and thus was assigned an 'RR4', or 31%-50% recovery. Summary of Financial Adjustments Stock-based compensation, transaction expenses and integration expenses. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations ESG issues are credit neutral or have only a minimal credit impact on the entity(ies), either due to their nature or the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. ACCO Brands Australia Holding Pty Limited ----senior secured; Long Term Rating; Affirmed; BB+ ACCO Brands Corporation; Long Term Issuer Default Rating; Affirmed; BB; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; BB ----senior secured; Long Term Rating; Affirmed; BB+ Contacts: Primary Rating Analyst Christopher O'Donnell, Director +1 646 582 3469 Fitch Ratings, Inc. 33 Whitehall Street New York 10004 Primary Rating Analyst David Silverman, CFA Senior Director +1 212 908 0840 Fitch Ratings, Inc. 33 Whitehall Street New York 10004 Secondary Rating Analyst David Silverman, CFA Senior Director +1 212 908 0840 Secondary Rating Analyst Christopher O'Donnell, Director +1 646 582 3469 Committee Chairperson Monica Aggarwal, CFA Managing Director +1 212 908 0282
Media Relations: Elizabeth Fogerty, New York, Tel: +1 212 908 0526, Email: elizabeth.fogerty@thefitchgroup.com. Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 27 Mar 2020) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10111917 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) https://www.fitchratings.com/site/re/10090792 Parent and Subsidiary Rating Linkage (pub. 27 Sep 2019) https://www.fitchratings.com/site/re/10089196 Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). 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