(Editor's Note: In the original version of this report, published April 23, 2007, the amount of the first-lien U.S. term loan B was listed incorrectly in the tables. A corrected version follows.)
On April 23, 2007, Standard & Poor's Ratings Services assigned its bank loan and recovery ratings to $845 million in secured credit facilities proposed by
Deluxe Entertainment Services Group Inc. (Deluxe; B/Stable/--). The proposed $735 million first-lien bank loan is rated 'B', at the same level as the corporate credit rating on Deluxe. The recovery rating is '3', indicating an expectation for meaningful (50%-80%) recovery of principal in the event of a payment default. The first-lien facilities consist of a $125 million unfunded revolving credit facility due 2011, a $25 million prefunded revolving credit facility due 2013, a $535 million U.S. term loan due 2013, and a US$50 million Canadian term loan due 2013.
The $110 million second-lien term loan due 2013 is rated 'CCC+', two notches below the corporate credit rating on Deluxe. The recovery rating is '5', indicating the expectation for negligible (0%-25%) recovery of principal in the event of a payment default, as a result of the loan's junior lien position and the substantial amount of first-lien debt.
The company will use proceeds of the facilities to fund a special dividend, to refinance existing facilities, and for general corporate purposes. The borrower is Deluxe Entertainment Services Group Inc. and the coborrower is Deluxe Toronto Ltd. (For the latest complete corporate credit rating rationale on Deluxe, see "
Deluxe Entertainment Services Group ‘B’ Corporate Credit Rating Affirmed; Bank Loans Rated," published earlier today on RatingsDirect.)
Table 1
Deluxe Entertainment Services Group Inc.--Credit Profile
Corporate credit rating
B/Stable/--
Facility/Issue
Issue rating
Recovery rating
Expected recovery (%)
Maturity
Repayment
$25 million prefunded revolving credit facility
B
3
50-80
2013
Bullet
$125 million unfunded revolving credit facility
B
3
50-80
2011
Bullet
$535 million first-lien U.S. term loan B
B
3
50-80
2013
$40 million in 2007, $60 million in 2008, $60 million in 2009, $50 million in 2010, $50 million in 2012, and $275 million in 2013.
US$50 million first-lien Canadian term loan*
B
3
50-80
2013
Same as above
$110 million second-lien term loan B
CCC+
5
0-25
2013
Bullet
*The borrower is Deluxe Toronto Ltd.
Recovery Analysis
Simulated default scenario
Standard & Poor's simulated default scenario assumes that a combination of the following secular and economic pressures lead to a default:
Wide adoption of digital projection, leading to a significant decline in 35mm film processing demand and physical film distribution; and
Increased competitive pressures as the digital transition progresses.
Valuation
The recovery analysis assumes that EBITDA falls to a level insufficient to meet debt service requirements. Standard & Poor's believes that lenders would achieve the greatest recovery value through reorganization. Under the simulated default scenario, the recovery analysis assumes reorganization, with the company's Creative Services business as the surviving enterprise and liquidation of the Film Processing and Distribution business. It also assumes fully drawn credit facilities and a 4x emergence multiple. We reviewed company-supplied appraisals of the company's real estate supporting its Film Processing and Distribution business and assumed additional value would be available from the sale of these assets. We adjusted the value available to secured creditors to reflect the pledge of only a 66% of the capital stock of foreign subsidiaries, representing approximately 20% of EBITDA.
Results
Based on this default scenario, first-lien holders could expect a meaningful (50%-80%) recovery of principal and second-lien holders could expect a negligible (0%-25%) recovery of principal.
Transaction Summary
Table 2
Transaction Summary
First-lien facilities
Second-lien facility
Borrower(s)
Deluxe Entertainment Services Group Inc. and Deluxe Toronto Ltd.
Deluxe Entertainment Services Group Inc. and Deluxe Toronto Ltd.
Guarantor(s)
DX Holdings LLC and each of Deluxe's existing and acquired domestic and foreign subsidiaries, to the extent that no adverse tax consequences would result.
DX Holdings LLC and each of Deluxe's existing and acquired domestic and foreign subsidiaries, to the extent that no adverse tax consequences would result.
Structure
The first-lien facilities include a $125 million unfunded revolving credit facility, a $25 million prefunded revolving credit facility, a $535 million first-lien U.S. term loan B, and a $50 million Canadian term loan. The first-lien credit agreement includes a collection allocation mechanism, which is designed to equalize recoveries between lenders in the U.S. tranche and those in the Canadian tranche. The term loan amortizes in annual installments set forth as follows: $40 million in 2007, $60 million in 2008, $60 million in 2009, $50 million in 2010m $50 million in 2012, and $275 million in 2013.
No required amortization.
Security package
First-priority, perfected security interest in substantially all of Deluxe Entertainment Services Group Inc.'s, and Deluxe Toronto Ltd.'s, and the guarantors' tangible and intangible assets (except that the collateral of Deluxe Toronto Ltd. shall only secure the obligations of Deluxe Toronto Ltd.), first-priority security interest in 100% of Deluxe Entertainment Services Group Inc.'s, DX Holdings LLC's, and the subsidiary guarantors' capital stock, and 66% of the voting stock of each of the company's foreign subsidaries.
A second-priority, perfected security interest in substantially all of Deluxe Entertainment Services Group Inc.'s, Deluxe Toronto Ltd.'s, and the guarantors' tangible and intangible assets (except that the collateral of Deluxe Toronto Ltd. shall only secure the obligations of Deluxe Toronto Ltd.); a second-priority security interest in 100% of Deluxe Entertainment Services Group Inc.'s, DX Holdings LLC's, and the subsidiary guarantors' capital stock; and 66% of the voting stock of each of the company's foreign subsidaries.
Limitation on borrowing availability
The revolving credit facility is fully available, subject to covenant compliance. Of the revolving credit facility, $25 million will be prefunded. The term loan must be drawn at closing.
The term loan must be drawn at closing.
Legal jurisdictions/issues
New York.
New York.
Key covenants
Maximum leverage ratio, maximum first-lien leverage ratio, minimum interest coverage ratio.
Maximum leverage ratio, minimum interest coverage ratio.
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