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Investing.com -- S&P Global Ratings has upgraded Deluxe Corp (NYSE:DLX)., a U.S.-based payments and data provider, to ’B’ from ’B-’ due to its improved cash flow and lower leverage. The company reported lower restructuring costs and greater cost savings in 2024, leading to a decrease in its S&P Global Ratings-adjusted leverage to 5.4x from 6.6x in 2023.
The ratings agency also upgraded the company’s issue-level rating on its senior secured debt to ’B+’ from ’B’, and on its senior unsecured debt to ’CCC+’ from ’ CCC (WA:CCCP)’. However, the recovery ratings on Deluxe’s debt remain unchanged. The positive outlook is based on the potential for the company to increase its profitability and cash flow, which could enable it to improve its credit metrics.
The upgrade reflects Deluxe’s reduced leverage and the expectation that it will continue to improve its margin and cash flow generation. In 2024, the company was able to reduce its S&P Global Ratings-adjusted debt to EBITDA to about 5.4x from 6.6x the previous year, largely due to lower-than-anticipated restructuring costs and efficiency improvements.
S&P Global Ratings forecasts that Deluxe will further reduce its restructuring costs to about $25 million in 2025 and $10 million in 2026. The company is also projected to reduce its S&P Global Ratings-adjusted leverage below 5x in 2025, with further deleveraging below 4x in 2026. This is supported by increases in its EBITDA and ongoing debt reduction.
The company’s revenue growth is expected to remain muted at about 1% in 2025 before accelerating to the 3%-5% range in 2026. Deluxe’s transformation to a payments and data company from a legacy check printing company contributed to the low-single-digit percent declines in its revenue and weaker EBITDA margins in previous years.
The company’s merchant services segment is expected to increase its revenue by 6%-9% annually over the next couple of years. Additionally, the revenue from its B2B payments and data segments is expected to increase by 9% and 5%, respectively, in 2025.
Deluxe plans to maintain a prudent capital-allocation policy focused on debt repayment as it works to reduce its leverage toward its 3x net leverage target. The company’s financial policy prioritizes debt repayment and deleveraging to achieve its publicly stated net leverage target range of less than 3.0x by 2026.
In 2024, Deluxe reduced its total outstanding debt by roughly $90 million to $1.5 billion through a combination of mandatory debt repayment and a reduction in its total outstanding revolver borrowings. The company is expected to continue using its cash flow to repay its outstanding debt balances, supported by its improving FOCF and flat interest expense of about $123 million in 2025, reducing to $105 million in 2026.
The positive outlook reflects the potential that Deluxe will increase its profitability and cash flow generation, which could enable it to improve its credit metrics. S&P Global Ratings could revise its outlook on Deluxe to stable over the next 12 months if it expects its S&P Global Ratings-adjusted leverage will remain above 5x and its FOCF to debt will remain below 10% on a sustained basis. The rating could also be raised if the company improves its debt to EBITDA below 5x and sustains it at that level, and its FOCF to debt approaches 10% on a sustained basis.
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