OREANDA-NEWS. Fitch Ratings has affirmed the ratings for ACCO Brands Corporation's (ACCO) Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is Stable. A full list of ACCO's ratings follows at the end of this release.

Fitch's ratings on ACCO are predicated on the company's stable free cash flow and ongoing debt paydown, but constrained by concerns regarding secular challenges and channel shifts within the company's merchandise mix as well as the risk of further debt-financed acquisitions. The time management (calendars) and storage categories represent approximately 30% of ACCO's sales, and both categories have seen declines given ongoing shifts online. In addition, the office supply superstores, which represent 24% of ACCO's sales, have been losing share to other players including general merchants and online-only competitors.

KEY RATING DRIVERS

Limited Organic Growth Yields Tight Margin Management

The office products industry is experiencing a slow secular decline due to a shift towards digital technologies. The growth of private label penetration in the industry has further pressured sales of branded products (including many of those in ACCO's portfolio). Finally, channel shift away from the traditional office products retailers and toward discounters and online-only players have forced vendors like ACCO to optimize channel management to maintain share. While ACCO benefits from its market leading position, with over 80% of sales generated from products ranked #1/#2 in their respective categories, the company has not been immune to industry challenges.

To preserve and improve margin in the difficult operating environment, ACCO has maintained a tight focus on its cost structure and improved profitability despite negative or limited organic growth. Further, the company has been and is likely to continue exiting unprofitable business lines and relationships, such as the 2015 exit from the tablet accessories market. As a result of the company's efforts, EBITDA margins steadily increased from the upper single digits in 2008 to almost 12% by 2011. Then, through the highly accretive acquisition of MeadWestvaco Corporation's Consumer & Office Products division (Mead) in May 2012, margin growth accelerated even further to more than 15% in 2015. To mitigate ongoing sector pressure, Fitch expects the company will continue to actively manage its cost structure.

Growth through Acquisitions

ACCO intends to be a leader in this consolidating industry. Fitch expects the company to focus on accretive acquisitions to reduce costs with a positive benefit to profitability and FCF. However, this will result in periodic increases in leverage. It partially addressed the move to faster-growing mass channels with the MeadWestvaco Consumer and Office Products division (Mead) acquisition in 2012.

In second quarter 2016 (2Q16), ACCO announced the acquisition of the remaining 50% of Pelikan Artline Pty Limited, its joint venture (JV) company serving the Australia and New Zealand markets, as well as the buyout of a minority interest in a subsidiary of the JV. From a strategic standpoint, Fitch views the buyout as a modest positive, as it will give ACCO control over its Australian business and allow for cost synergies with existing operations.

Strong Cash Flow and Improving Leverage

ACCO has generated positive free cash flow (FCF) every year since 2007 except for 2012, which was modestly negative after adjusting for approximately $78 million in transaction and refinancing fees related to the Mead acquisition. The company has an excellent track record in meeting its public FCF goals. The company generated $146.6 million FCF in 2015, and Fitch expects it to be flat at around $140 million in 2016, and around $150 million annually thereafter.

Leverage, FCF, and margins have improved, supporting good liquidity and access to the capital markets despite secular challenges. Fitch views the company's focus on maintaining solid metrics and directing much of its FCF to debt reduction as positive for the rating. ACCO has demonstrated a strong track record in deleveraging post its strategic acquisition of Mead in 2012. Bank covenant leverage ratio was reduced from over 3.5x in 2012 to below 3x in 2015, and Fitch expects the company to continue directing a meaningful portion of its FCF to debt paydown.

ASSUMPTIONS

--Revenue is expected to increase 5% to $1.58 billion in 2016 as a result of the incremental $70 million in sales from the Australian JV purchase. Revenue for the existing ACCO business is expected to be flattish on a constant currency basis annually.

--EBITDA is expected to be in the $250 million range in 2016, as positive EBITDA from the Australian JV will be somewhat mitigated by the impact of the strong U. S. dollar on ACCO's operating results. Flattish sales, coupled with strong expense management, could keep EBITDA range-bound at around $250 million over the next several years, absent any acquisitions.

--FCF is expected to be around $140 million in 2016, in line with 2015 results, and $150 million thereafter. In 2016, Fitch anticipates ACCO will use FCF to pay down debt and continue to repurchase its equity. Absent an acquisition, which ACCO could finance with a combination of FCF and debt, Fitch assumes that beginning 2017 FCF is used to repurchase shares and reduce debt, driving leverage from the low-3.0x range in 2016 to below 3.0x.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--An upgrade beyond the 'BB' range is possible if the company makes acquisitions that change its business mix or model to one with less cyclical or higher growth prospects while maintaining leverage below 3.0x. However, an upgrade is not anticipated in the near term given existing business model issues.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Inability of the company to cut costs to offset the impact of declining sales and maintain current credit protection measures and cash flows.

--Sustained gross leverage at or above 4x, with FCF materially below expectations.

--A large debt-financed acquisition without a concrete plan to reduce debt meaningfully below 4x in the 24-month time frame post a transaction could lead to a negative rating action.

LIQUIDITY AND DEBT STRUCTURE

ACCO had ample liquidity of $229 million as of June 30, 2016, composed of $96 million cash and cash equivalents, and revolver availability of $133 million. Liquidity is expected to be even higher at year-end, ACCO's seasonal peak. The company's debt includes borrowings under its $300 million revolver ($158 million outstanding as of June 30, 2016), term loans, and $500 million in unsecured notes. As of June 30, 2016, outstanding term loan amounts include $151 million on the company's U. S. term loan A and $74 million on the company's AUD term loan A, which was issued this year to finance the Pelikan Artline Pty Limited JV buyout. Annual term loan amortization is manageable at $30 million-$40 million per year, with no significant maturities until 2020.

Fitch has assigned Recovery Ratings (RRs) to the various debt tranches in accordance with 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 assigned an 'RR1' to first lien secured debt, notching up one from the IDR, indicating outstanding recovery prospects (91% - 100%) given default. The revolver and US Term Loan A are secured by substantially all assets of ACCO while the AUD Term Loan A is secured by substantially all assets of ACCO's Australian subsidiary, ACCO Brands Australia Holding Pty. Unsecured debt will typically achieve average recovery, and thus was assigned an 'RR4', or 31% - 50% recovery.

FULL LIST OF RATING ACTIONS

Fitch has affirmed the following ratings:

ACCO Brands Corporation

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

--$300 million senior secured revolving credit facility due April 2020 at 'BB+/RR1';

--$151 million senior secured US Term Loan A due April 2020 at 'BB+/RR1';

--$500 million senior unsecured 6.75% notes due April 2020 at 'BB/RR4'.

The bank revolving credit facility, US Term Loan A, and the senior unsecured notes are guaranteed by domestic (mostly Delaware and Nevada) subsidiaries.

In addition, Fitch has assigned the following rating:

ACCO Brands Australia Holding Pty.

--$74 million (USD equivalent) AUD Term Loan A at 'BB+/RR1'.

The AUD Term Loan A is guaranteed by ACCO Brands Australia Holding Pty, a wholly owned subsidiary of ACCO Brands Corporation, and secured by substantially all assets of the subsidiary.

The Rating Outlook is Stable.