R.R. Donnelley New 7 Year - Buy The 11.75% Instead

| About: R.R. Donnelley (RRD)

R.R. Donnelley (NASDAQ:RRD) came to market with a new seven year issue. Here are the details:

Security: 8.250% Notes due 2019
Note Type: Unsecured
Principal Amount: $450,000,000
Maturity: March 15, 2019
Coupon: 8.250%
Redemption Provision: Callable at the greater of par or MW +50

Change of control: If a change of control event occurs with respect to RR Donnelley and the notes are rated below investment grade by both Moody's and S&P the company will be required to offer to repurchase all outstanding notes at a price equal to 101% of the aggregate principal amount of the notes, together with accrued and unpaid interest.

The company plans to use the proceeds of this issue to (1) partially fund tender offers for up to $450.0 million aggregate principal amount of their debt securities, including up to $350 million of the 4.95% Notes due 2014 and up to $100 million of the 5.50% Notes due 2015 and (2) to pay premiums in connection with those tender offers. If there are any remaining proceeds, the company intends to use those proceeds to repay borrowings under their revolving credit facility.

I wrote about the company earlier and here is my summary on the debt:

Looking at RRD's debt, the yield is more akin to "B" rated debt (Barclay's HY Index lists "B" rated debt as having a yield to worst of 9.12% while "BB" debt yields 6.84%). As RRD is rated high BB, this gives some cushion against downgrades (which I would somewhat expect). RRD's debt (for the most part) contains change of control covenants and has a limitation on secured debt (principal properties of US restricted subsidiaries) with a 15% carve-out. The 11.25% notes due 2019 have step-up language, currently have a coupon of 11.75% and the potential to step another 150bps should the notes get downgraded to "B".

As I am not fond of the sector, I would stay shorter if I were going to buy the company's bonds. As I stated in the summary, I do not see significant upside in the name, although they should outperform similarly rated bonds due to their higher yield. If the company comes out with decent earnings (after guiding lower) and a compelling story (somewhat more difficult) you could see the bonds add a couple points to get closer to their pre-revision levels. Of the listed bonds, I believe that the 16's are the most compelling as they are cheap on the company's credit curve and have the highest Z spread (zero vol).

Nothing has changed since then. I would still prefer the 16s, but if I had to be in the seven year segment of the curve, I would be looking at the 11.75%s - they last traded at $111 (on the 24th) - as the yield at those levels is 9.53% and the bonds have step-up language which could increase the coupon 150bps should the bonds hit "B" ratings.

In order for the bonds to trade at 8.25% (which they will not do as a result of the premium), they would have to trade at a price of $118. I would put a yield of around 8.50% - 8.60% on the bonds (to compensate for the premium) which translates into a $116.2 - $116.7 price.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.