Quebecor World, Meet The New Credit Market

This Quebecor World (NYSE: IQW) research note was put out Monday morning by Genuity Capital Markets. There’s no beating around the bush. Despite having a US$1.2 billion market cap. and US$570MM of EBITDA forecast for 2007, their lenders knocked back QW’s credit facility from US$1 billion (of which only US$100MM was drawn) to US$750MM, which must be dropped to US$500MM by next summer.

The rate also rose from 6.8% as at 12/06 to what Genuity estimates is 8%. Genuity thinks this is due to moves in LIBOR, but the US$ LIBOR is 5.23% this am, versus 5.37% a year ago; Sterling LIBOR has risen from 5.13% to 6.278% in a year.

With flat EBITDA versus 2006, 120 bps is a big price bump. I’ll bet they aren’t paying as much as 8%, but that’s just a guess:

"• On Friday, Quebecor World announced that it had agreed with its lenders on a revised credit facility. The revised line is for US$750 million, of which a portion will be secured by a lien on
assets. It is to be reduced further to $500 million by July 2008 and includes certain restrictions on the use of proceeds and terms of repayment.

• The prior facility provided up to US$1 billion, of which about US$100 million was drawn at the end of the last quarter.

• IQW also announced that it planned to redeem all public notes issued by Quebecor World Capital Corp. This will result in a US$370 million outlay. Arguably, IQW probably elected to redeem this debt before breaching certain related covenants later this year.

• Relative to the terms of the previous agreement, the new facility likely calls for higher rates than the 6.8% the company was paying as of December 2006, according to the latest annual
report. We have estimated the cost at 8%, given the current level of LIBOR and spreads on non-investment grade debt facilities.

• The previous facility carried three sets of covenants; 60% debt-tototal capitalization, 4.5x net debt/EBITDA (step-down to 4x when issuing Q3/07 results), and 3.5x TTM EBITDA/interest. In all three cases, IQW had little breathing room left. The covenants under the new facility should be disclosed sometime this week when IQW files documents with SEDAR.

• Friday’s announcement was widely anticipated. It should reduce near-term liquidity issues at IQW, ahead of what is to be a critical 2008. Investors’ expectations for this name will be ratcheted upwards in the year to come, given expected efficiency gains from new equipment, a better FCF profile in light of reduced CAPEX, and a possible divestiture of European operations.

• We reiterate our HOLD – Above Average risk rating on Quebecor World and our US$10.00 target price.”