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  Title	Fitch Revises ACCO Brands Corporation's Outlook to Negative; Affirms Ratings
  ID	4788607
  External ID	7365849477
  Author	Unknown
  Published Date	Dec. 5, 2024, 1:19 p.m.
  Summary	Thu 05 Dec, 2024 - 2:16 PM ET Fitch Ratings - Toronto - 05 Dec 2024: Fitch Ratings has affirmed ACCO Brands Corporation's (ACCO) ratings, including its Long-Term Issuer Default Rating (IDR) at 'BB',
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  URL	https://www.fitchratings.com/research/corporate-finance/fitch-revises-acco-brands-corporation-outlook-to-negative-affirms-ratings-05-12-2024
  Sentiment	Negative: 0.97065    Neutral: 0.01773    Positive: 0.01162
  Relevance	0.04274

• Content Details

  Content ID	2873441
  Key	98a64c1c-60de-4853-a12f-8f7ed942dab1
  Content	Thu 05 Dec, 2024 - 2:16 PM ET Fitch Ratings - Toronto - 05 Dec 2024: Fitch Ratings has affirmed ACCO Brands Corporation's (ACCO) ratings, including its Long-Term Issuer Default Rating (IDR) at 'BB', its senior secured revolving credit facility (which is co-borrowed by ACCO Brands Australia Holding Pty Limited) and term loan at 'BBB-' with a Recovery Rating of 'RR1', and its senior unsecured notes at 'BB'/'RR4'. The Rating Outlook has been revised to Negative from Stable. The Negative Outlook reflects Fitch's view that ACCO's leverage could be sustained above 3.5x over the next 12-24 months given ongoing declines in revenue and EBITDA, without a meaningful offset from debt reduction from FCF. The company could also divert FCF toward acquisitions to support revenue and EBITDA and offset secular declines in its core business, which could result in leverage sustaining above 3.5x. The ratings also consider ACCO's leading market position in the office products category, annual FCF generation and no near-term maturities. Key Rating Drivers Declining Organic Sales: Fitch projects ACCO's sales will decline by high-single-digits in 2024 (to around $1.67 billion) and continue to decline by low single digits thereafter. The decline is driven by secular declines in the company's core office products categories, SKU reductions, slowing post-pandemic office returns, macroeconomic challenges, and conservative retailer ordering. Growth in tech accessories and share gains outside of North America are potential positives but unlikely to offset core declines. Fitch calculated EBITDA is forecast to decline to around $230 million in 2024 compared to $255 million in 2023 and from an average of around $300 million between 2017-2019. EBITDA could modestly fall to the $220 million to $230 million range in 2025 and 2026. Fitch believes ACCO will need to invest heavily in its existing portfolio as well as execute on acquisitions to generate modest top line growth. The company took a similar approach to offset declining sales between 2016 and 2020 and spent around $800 million on acquisitions in higher growth categories and/or geographies. Acquisitions May Sustain Leverage Above 3.5x: Fitch forecasts ACCO's leverage at about 3.6x for 2024, but it could remain above 3.5x in 2025 if the company is unable to reduce debt with FCF or prioritizes acquisitions over debt repayment. Fitch believes ACCO will likely pursue acquisitions to drive revenue and EBITDA growth and offset secular declines in its core business. Historically, the company has used debt to finance acquisitions, as it did with PowerA in 2020. ACCO targets being within 2.0x - 2.5x net leverage, but Fitch views this as aspirational since the company has not been in that range for several years. Good Expenditure Management: Fitch expects ACCO to generate EBITDA margins of about 13.9% in 2024, driven by cost savings and efficiencies that offset lower fixed cost absorption from declining sales volumes. The company's multi-year cost efficiency program targets $60 million in savings, which should bring EBITDA margins to the low 14% range over the next several years. We forecast FCF margins will remain strong in the 5%-6% range annually. Long-term profitability could decline if office product sales continue to drop without offsetting growth in other categories. Secular Business Pressures: ACCO is highly exposed to secular office product declines from the shift toward digital technologies and away from paper. This is partially offset by growth and market share gains in emerging markets. ACCO is also managing a shift in revenue away from traditional retail channels to discounters, e-commerce and independent channels. Business essentials (53% of revenues) is likely to keep declining by mid to high single digits annually. Fitch projects overall revenue declines of 3% in 2025 and 1% thereafter, with tech accessory growth (17% of revenues) and stable revenue from learning and creative (30% of revenue). Reasonable FCF, Minimal Refinancing Risk: ACCO should generate FCF in the $80 million-$100 million range annually over the next several years (after dividends), supporting its liquidity profile. The company has no near-term debt maturities after it extended its credit facilities in October 2024 and used its revolver to repay its AUD and USD term loans and a portion of its EURO term loan. Evolving Tariff Landscape : The tariff landscape is still evolving, but Fitch believes any increase to input or selling costs as a result of tariffs or other regulatory costs would negatively affect ACCO's sales and EBITDA. ACCO shifted a large portion of manufacturing away from China as a result of previous tariffs but still sourced approximately 60% of products from lower-cost countries (primarily in Asia) as of 2023. Many of ACCO's products are highly discretionary, and if it had to pass on increased costs to consumers it would likely lead to accelerated declines in sales. Derivation Summary ACCO's BB rating is constrained by secular challenges in the office products industry, and its leverage downgrade sensitivity is 0.5x tighter than other BB rated peers not facing secular declines. Other similarly rated peers in Fitch's coverage portfolio are Central Garden & Pet Company (CENT; BB/Stable), Spectrum Brands, Inc. (Spectrum; BB/Stable) and Newell Brands Inc. (Newell; B+/Stable). CENT maintains a strong market position in the pet, lawn and garden segments, ample liquidity, and EBITDA leverage in the mid-3x vicinity. These strengths are moderated by mid-single digit revenue decline in fiscal 2024 and limited scale, with EBITDA in the low to mid-$300 million range; and customer concentration. Spectrum's recovering EBITDA and material debt reduction in 2024 should support EBITDA leverage sustained below 2.5x, including below 2.0x in FY2024 (ending Sept. 30), compared to 6.7x in fiscal 2023. Spectrum's rating also reflects the lack of clarity on its longer-term business mix, driven by the potential divestiture of its Home and Personal Care (HPC) business and active history of M&A. Newell's 'B+' ratings reflect ongoing challenges that indicate significantly reduced medium-term earnings power and cash flow relative to 2018-2022 levels. Beyond the current slowdown in discretionary consumer spending, execution risk remains as Newell continues to realign and restructure its business segments and supply chain network and to reposition its brand portfolio. Fitch expects EBITDA to remain below $1 billion in the near term, with EBITDA leverage (gross debt/EBITDA) elevated in the mid-5x in 2024 and then trending toward the low-5x range. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer Include --Overall revenue decline of around 3% in 2025 and in the 1%-2% range thereafter, following a projected decline of around 9% in in 2024. --Secular pressures continue to drive declines in the MSD range for office products across the horizon, partially offset by growth in technology and low growth in learning and creative. --Cost savings initiatives support margins in the low 14% range in 2025 and 2026. --FCF margins remain healthy in the 5%-6% range, yielding FCF in the $80 to low $100 million range annually from 2024 to 2026. The company uses its FCF to pay down debt such that leverage to returns to the low 3.0x range beginning 2025. --The inability of the company to stem the level of revenue and EBITDA declines or a debt financed acquisitions would be a ratings concern. --Floating interest rates ranging from 3.5% to 5%. Recovery Analysis Fitch assigned Recovery Ratings to the various debt tranches in accordance with our 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 'BBB-'/'RR1', two notches above the IDR, reflecting outstanding recovery prospects in the event of default. ACCO's unsecured debt has average recovery prospects and is rated 'BB'/'RR4'. RATING SENSITIVITIES Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade --An upgrade is unlikely in the near term given the existing business model and industry issues, but an upgrade could be possible if ACCO makes favorable acquisitions that successfully shift its business mix toward less-cyclical or higher-growth categories, supporting sustained sales and EBITDA growth while maintaining EBITDA leverage below 3.0x. --The Outlook could be revised to Stable if ACCO's EBITDA stabilized around at least $225 million and it materially reduced debt to a point where Fitch was confident that it could durably maintain EBITDA leverage below 3.5x. Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade --Continued declines in sales and EBITDA, with EBITDA approaching $200 million. --EBITDA leverage sustained above 3.5x. --A debt-financed acquisition without a concrete plan to reduce EBITDA leverage to below 3.5x within 12-24 months of the close of the acquisition. Liquidity and Debt Structure ACCO's liquidity profile is good, supported by reasonable annual FCF generation that is seasonally skewed to the second half of the year. ACCO had $102 million of cash on hand as of September 30, 2024, and pro-forma for its recent amendment, Fitch believes that ACCO had availability of around $265 million on its revolver. On Oct. 31, the company announced an amendment of its credit facilities where it reduced the revolver size to $467.5 million (from $600 million previously), and extended the maturity to either 180 days prior to the maturity of its 4.25% senior notes (maturing March 15, 2029), or Oct. 30, 2029, if the notes are extended beyond the maturity of the credit facility. The company used revolver availability to repay the outstanding balance on its US and AUD term loans, as well as a portion of the EUR term loan. Pro forma for the amendment ACCO had around $900 million of debt outstanding, consisting primarily of revolver drawings, US$133.4 million on its EUR senior secured term loan A (maturing Oct. 30, 2029) and $575 million of unsecured notes (maturing in March 2029). Issuer Profile ACCO Brands is one of the world's largest designers, marketers and manufacturers of branded academic, consumer and business products. The product portfolio includes well-known brands, including Swingline, Five Star, Mead, AT-A-GLANCE, Kensington, PowerA, GBC, Tilibra, Leitz and Rapid. Summary of Financial Adjustments Historical EBITDA has been adjusted for stock-based compensation, impairment charges, transaction & integration expenses and other items. 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. MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS Click here to access Fitch's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. Fitch's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included. ESG Considerations The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores RATING ACTIONS Entity / Debt Rating ACCO Brands Australia Holding Pty Limited senior secured LT BBB- Affirmed BBB- ACCO Brands Corporation LT IDR BB Affirmed BB senior unsecured LT BB Affirmed BB senior secured LT BBB- Affirmed BBB- Additional information is available on www.fitchratings.com PARTICIPATION STATUS The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 ADDITIONAL DISCLOSURES ENDORSEMENT STATUS ACCO Brands Australia Holding Pty Limited EU Endorsed, UK Endorsed ACCO Brands Corporation EU Endorsed, UK Endorsed
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