New York, December 12, 2012 -- Moody's Investors Service (Moody's) downgraded the Corporate Family Rating (CFR) for The Sheridan Group, Inc. (Sheridan) to Caa1 from B3. The senior secured notes rating was also downgraded to Caa1 from B3 and the Probability of Default Rating (PDR) was downgraded to Caa2 from Caa1. The rating action is prompted by increasing risks that the intense secular challenges facing the printing industry will compromise refinance activities as Sheridan addresses the October 2013 maturity of its working capital facility and the April 2014 maturity of its senior secured notes.

A summary of today's actions follows.

Sheridan Group, Inc. (The)

....Corporate Family Rating, downgraded to Caa1 from B3

....Probability of Default Rating, downgraded to Caa2 from Caa1

....Senior Secured Notes, downgraded to Caa1 LGD-3, 40% from B3, LGD-3, 39%

Outlook, remains Negative RATINGS RATIONALE Sheridan's Caa1 CFR reflects risks that the intense secular challenges facing the printing industry will compromise refinance activities as the company addresses its upcoming maturities, including the $15 million revolving working capital facility due October 2013 and the $128 million senior secured notes in April 2014. The print industry's highly negative secular pressures include declining demand, excess capacity, intense competition and pricing pressure. The company's modest scale, which amplifies competitive pressure, also constrains the rating. The rating benefits from actions taken by Sheridan's management. Revenues have remained relatively stable through 2011 and the first three quarters of 2012 despite challenging industry conditions and weakening performance at peers. A closing of a printing plant and consolidation of printing activity into its Dartmouth facility in 2011 have led to higher year over year EBITDA levels and margins. In addition, the company has used free cash flow or revolver availability to buy back its notes at a discount that has helped to reduce the amount of debt outstanding. However, additional cost savings of comparable size will be difficult to replicate and the company will have to continue to win new business in a declining industry to keep revenue at current levels. Given the fixed cost nature of the industry, a loss of customers, to either its competitors or from a customer going out of business, will put pressure on the company despite its diversified revenue stream. While leverage has declined from 4.3x at the end of 2011 to 3.6x as of Q3 2012 (including Moody's standard adjustments), we anticipate that the company will have difficulty refinancing its senior secured notes.

Liquidity is limited to cash generated from operations, an undrawn $15 million working capital facility ($1.3 million of letters of credit outstanding as of Q3 2012) which matures in October 2013, and $1.3 million of cash on the balance sheet. Its revolver has been used to fund the buyback of its notes at a discount ($9.5 million during the first three quarters of 2012 and $8.2 million in 2011) and make its semiannual interest payment in Q2 and Q4. The buybacks at a discount provide interest expense savings and slight deleveraging, but has the potential to limit revolver availability to meet unanticipated liquidity needs, although we expect the company would manage its liquidity position prudently. The company is subject to a minimum EBITDA covenant which is currently set at $34 million, but increases to $35 million at the end of 2Q 2013. We would expect lenders to work with the company in the event of a violation given the already high interest rate on the notes and Moody's expectation that the company would have a higher valuation as a going concern.

The negative outlook reflects the upcoming debt maturities in 2013 and 2014 which will be challenging to refinance given the ongoing secular pressures in the print industry. In addition, the company has a modest cushion of compliance with its minimum EBITDA covenant, although we do not anticipate a violation in the near term.

The outlook could be changed to stable if the company is able to refinance its senior secured notes at reasonable interest rate levels. An upgrade would require the ability to demonstrate that it could operate within a refinanced capital structure on a sustainable basis with sufficient free cash flow of approximately 10% and total leverage below 3.5x.

The rating would likely be downgraded if it increasingly appeared likely that the company would default on its debt due to liquidity issues or an inability to refinance its debt at maturity.

The principal methodology used in rating Sheridan Group was the Global Publishing Industry Methodology published in December 2011. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Headquartered in Hunt Valley, Maryland, Sheridan provides printing solutions to niche markets within the specialty journal, catalog, magazine and book segments. Sheridan operates through three business segments - Publications (55% of revenues), Catalogs (25% of revenues), and Books (20% of revenues) through the first three quarters of 2012. Its annual revenue is approximately $266 million as of Q3 2012.

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Scott Van den Bosch Vice President - Senior Analyst Corporate Finance Group Moody'sInvestors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653John Diaz MD - Corporate Finance Corporate Finance Group JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653 Releasing Office: Moody's Investors Service, Inc.250 Greenwich StreetNew York, NY 10007 U.S.A. JOURNALISTS: 212-553-0376 SUBSCRIBERS: 212-553-1653(C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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