OREANDA-NEWS. S&P Global Ratings said today that it lowered its corporate credit ratings on St. Petersburg, Fla.-based Checkout Holding Corp. and its subsidiary Catalina Marketing Corp. (collectively Checkout Holding) to 'CCC+' from 'B-'. The rating outlook is negative.

At the same time, we lowered our issue-level rating on Checkout Holding's first-lien revolving credit and term loan facility to 'B-' from 'B'. The '2' recovery rating is unchanged, indicating our expectation for substantial recovery (70%-90%; lower half of the range) of principal in the event of a payment default.

We also lowered our issue-level rating on Checkout Holding's second-lien term loan to 'CCC-' from 'CCC'. The '6' recovery rating remains unchanged, indicating our expectation for negligible recovery (0%-10%) of principal in the event of a payment default.

"The rating action is based on our view that Checkout Holding's high debt leverage, which is driven by the company's ultimate parent PDM (Holdings) Ltd.'s (not rated) increasing payment-in-kind (PIK) notes, has created an unsustainable capital structure," said S&P Global Ratings' credit analyst Dylan Singh. The notes have a mandatory PIK period until April 2016, after which Checkout Holding has the option to either continue to utilize an all-PIK interest payment at 11.25% annually, make a combination of cash and PIK payments at 5.4375% each annually, or make an all-cash interest payment of 10.50% annually. The notes become mandatory all cash payment after April 2019.

"We believe that Checkout Holding's cash flow won't be sufficient to make cash interest payments on the PIK notes," said Mr. Singh. "As a result, we believe the company will need to refinance or recapitalize its capital structure, before April 2019." Given that revenue growth depends on a large set of economic factors that are not completely within management's control, a poor ad booking season could result in negative cash flow that could accelerate the expected liquidity constraints and reduce the company's ability to manage its high leverage.

The negative rating outlook reflects our view that the growing PIK notes at Checkout Holding's parent, PDM (Holdings) Ltd., has led to an unsustainable capital structure and the company's cash flow growth may not be sufficient to cover the elevated interest when the PIK notes turn cash pay in 2019.

We could lower our corporate credit rating on Checkout Holding if the company doesn't address its growing PIK liability. We could also lower the rating if the company's discretionary cash flow to debt weakens and remains consistently below 0% due to either cash flow constraints once interest payments for the PIK notes begin or weaker-than-expected revenue and EBITDA growth over the next 12-18 months.

We could raise the rating if we believe Checkout Holding's discretionary cash flow to debt remains at 2.5%–3%, at least, on a consistent basis, such that the company would have sufficient cash flow to meet all its obligations, including the PIK cash interest payments and mandatory annual term loan amortization, without needing to access its revolving credit facility.