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TEXT-S&P cuts Roofing Supply Group rating to 'B'
2012年5月11日 / 晚上6点38分 / 5 年前

TEXT-S&P cuts Roofing Supply Group rating to 'B'

Overview	
     -- U.S.-based Roofing Supply Group LLC (RSG) plans to enter into a $290 	
million seven-year bank term loan B and will issue $200 million of senior 	
unsecured notes due 2020 to refinance existing debt and to partially fund its 	
acquisition by private equity firm Clayton, Dubilier & Rice LLC.	
     -- We are lowering our corporate credit rating to 'B' from 'B+' to 	
reflect the substantial increase in debt balances and leverage, consistent 	
with a "highly leveraged" financial risk profile. 	
     -- We are assigning our 'B' issue-level rating to the proposed $290 	
million senior secured bank term loan B and a 'CCC+' issue-level rating to the 	
$200 million senior unsecured notes due 2020. 	
     -- The stable rating outlook reflects our expectation that the company 	
will continue to generate modest positive free cash flow and maintain strong 	
liquidity while reducing total adjusted leverage to about 6x by year end 2012.	
	
Rating Action	
On May 11, 2012, Standard & Poor's Ratings Services lowered its corporate 	
credit rating on Dallas-based Roofing Supply Group LLC (RSG) to 'B' from 'B+'. 	
At the same time, we removed the ratings from CreditWatch negative, where they 	
were placed on April 24, 2012. The outlook is stable.	
	
At the same time, we assigned an issue-level rating of 'B' (the same as the 	
corporate credit rating) to RSG's proposed $290 million seven-year senior 	
secured bank term loan B. The recovery rating is '3', indicating our 	
expectation of meaningful (50% to 70%) recovery for lenders in the event of a 	
payment default. We also assigned an issue-level rating of 'CCC+' (two notches 	
below the corporate credit rating) to the proposed $200 million of senior 	
unsecured notes due 2020, with a recovery rating of '6', indicating our 	
expectation of negligible recovery (0% to 10%)to noteholders in the event of a 	
default. These securities are being issued pursuant to Rule 144A of the 	
Securities Act of 1933 without registration rights.	
	
The company intends to use proceeds of the proposed notes and term loan, 	
together with cash-on-hand and $210 million of equity from CD&R to fund the 	
acquisition and to repay outstanding borrowings, including its $225 million 	
senior secured notes due 2017. Standard & Poor's affirmed its 'B+' rating on 	
these notes and removed them from CreditWatch. We will withdraw our rating on 	
these notes upon closing of the new transactions.	
	
Rationale	
The downgrade reflects RSG's significant increase in leverage to nearly 6x 	
(adjusted for operating leases) due to the largely debt financed acquisition 	
of the company by private equity firm Clayton, Dubilier & Rice LLC (CD&R). 	
This results in our assessment of a highly leveraged financial profile with 	
leverage measures we would consider inconsistent with the prior rating given 	
our view of the company's "weak" business risk profile. Our business risk 	
assessment incorporates modest but improving operating profitability as a 	
distributor, geographic diversity limited to the U.S., a relatively small size 	
and scale of operations, highly competitive end markets, and exposure to 	
volatile construction cycles and unpredictable weather patterns. 	
	
Under our baseline scenario, we estimate leverage will likely decline modestly 	
over the next two years, improving to about 5x by the end of 2013. We expect 	
interest coverage of about 3.0x and funds from operations (FFO) to total debt 	
between 10% and 15% over that period. We consider these credit measures to be 	
consistent with the current rating and our view of its highly leveraged 	
financial risk profile. Partially offsetting these risks is our expectation 	
that the company will maintain strong liquidity, due to a very favorable 	
capital structure (minimum debt and capex requirements over the next several 	
years), no financial ratio maintenance requirements, positive cash flow 	
generation and significant availability under its $175 million asset-based 	
revolving credit facility. 	
	
Our baseline scenario assumes that RSG's roofing supply sales will be flat to 	
up to 1% to 2% in 2012 despite our economist's expectation of 740,000 housing 	
starts in 2012, a 21% increase over 2011. This should help boost demand for 	
RSG's roofing products. Offsetting this increase in sales is the likelihood 	
that in 2012 there will be less demand generated by storm activity in the 	
U.S., which was substantially above average in 2011. However, RSG benefits 	
from relatively stable demand because over 80% of its current sales come from 	
necessary repairs and replacement, which are largely non-discretionary	
	
Pro forma for the CD&R transaction and debt refinancing, we expect total debt 	
to approach about $530 million, (adjusted for pensions and operating leases). 	
Based on our assumptions for housing starts and GDP growth (up 2.1%) 	
assumptions, we expect EBITDA in 2012 to total about $85million to $90 	
million, improving to about $95 million in 2013 as housing markets recover. We 	
expect discretionary cash flow of about $35 million in each of the next two 	
years, which would easily cover annual capex requirements of about $5 million 	
to $7 million per year, with the difference ($25 million to $30 million) to be 	
available for reduction of term loan principal. 	
	
We are maintaining a positive long-term view of the roofing industry, given an 	
aging housing stock and high percentage of replacement business (currently 	
more than 80% for Roofing Supply Group). We view roof replacement as largely 	
nondiscretionary, with limited ability on the part of consumers to defer 	
replacement over the long term. Weather can also play a significant role, as 	
repairs required after hurricanes and other severe storms often cause an 	
increase in roofing sales, and stable weather patterns can result in less 	
demand. Still, the market is highly fragmented and RSG faces intense 	
competition from both larger, better capitalized companies and smaller local 	
players.	
	
Roofing Supply Group is the fourth largest distributor of roofing materials 	
and supplies in the U.S., with 59 branches in 24 states serving a diverse 	
group of roofing contractors, home builders, and retailers. 	
	
Liquidity	
Pro forma for the transaction, we expect liquidity to be "strong". We expect 	
the company's proposed $175 million asset-based (ABL) revolving credit 	
facility due 2017 and operating cash flow of about $35 million during 2012 to 	
be the primary sources of liquidity. The company generally borrows in the $20 	
million to $30 million range during the first half of the year to fund 	
seasonal growth, which usually reverts in the fourth quarter of the calendar 	
year through cash collections. Cash balances are generally minimal until the 	
fourth quarter. 	
	
Our view of the company's liquidity profile takes into consideration the 	
following factors:	
	
	
     -- We expect that liquidity sources (including cash, discretionary cash 	
flow, and availability under its $175 million ABL revolving credit facility) 	
will exceed uses by 1.5x over the next 12 months and 1x over the next 24 	
months.	
     -- We expect that liquidity sources will continue to exceed uses, even if 	
EBITDA were to decline by 30%.	
     -- Given the company will not be subject to financial ratio maintenance 	
covenants, we would not view liquidity as impaired following a 30% drop in 	
EBITDA.	
	
	
The company's liquidity also benefits from the proposed capital structure with 	
only a fixed-charge requirement effective when availability under the ABL 	
facility falls below minimum levels. Also, the company will have no debt 	
maturities until 2017 when its proposed ABL matures. Required amortization 	
under the term loan will total less than $3 million per year. CAPEX 	
requirements are very modest at $5 million to $7 million per year. We do not 	
anticipate significant acquisition activity or any dividend return to owners 	
in the next 1-2 years.	
	
Recovery analysis	
For the complete recovery analysis, see Standard & Poor's recovery report on 	
Roofing Supply Group LLC to be published on RatingsDirect after this report.	
	
Outlook	
The outlook is stable. We expect end-market demand for RSG's roofing products 	
to be relatively flat over the next 12 months because demand caused by the 	
expected improvement in housing starts will be offset by less storm activity 	
compared with 2011. As a result, we expect credit metrics to remain in line 	
with a highly leveraged financial risk profile, with adjusted leverage 	
improving to about 5x by the end of 2013. In addition, we believe liquidity, 	
in terms of cash, availability under the revolving credit facility, and cash 	
flow from operations will be more than sufficient to meet the company's 	
seasonal working capital needs and other obligations, including $5 million to 	
$7 million of estimated capital expenditures and about $30 million of annual 	
interest expense.	
	
In our view, we could consider raising the ratings if RSG's operating 	
prospects during the next several quarters exceed our current expectation due 	
to stronger-than-expected housing starts and higher roof replacement volumes 	
because of increased consumer confidence. Under this scenario, the company's 	
adjusted leverage could improve to 5x or below on a sustained basis.	
	
Although we think a downgrade is unlikely the near term, we could take a 	
negative rating action during this period if raw material cost volatility or 	
intense price competition brings operating margins to below 5%, causing the 	
company's credit measures to deteriorate below expected levels, or if the 	
company pursued an aggressive acquisition or dividend policy. Specifically, we 	
could lower the ratings if leverage exceeded 7x.	
	
	
Related Criteria And Research	
     -- Methodology And Assumptions: Liquidity Descriptors For Global 	
Corporate Issuers, Sept. 28, 2011	
     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009	
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008	
	
	
	
Ratings List	
Downgraded; Off CreditWatch; Outlook Stable	
                                                To             From	
Roofing Supply Group LLC	
 Corporate Credit Rating                        B/Stable/--    B+/Watch Neg/--	
	
New Ratings	
Roofing Supply Group LLC	
 Senior Secured	
  US$290 mil fltg rate sr secd term B due 2019  B                  	
   Recovery Rating                              3                  	
 Senior Unsecured	
  US$200 mil sr nts due 2020                    CCC+               	
   Recovery Rating                              6                  	
	
Ratings Affirmed; Off CreditWatch	
Roofing Supply Group LLC	
Roofing Supply Finance Inc.	
 Senior Secured                                 B+             B+/Watch Neg	
  Recovery Rating                               4              4	
	
	
Complete ratings information is available to subscribers of RatingsDirect on 	
the Global Credit Portal at www.globalcreditportal.com. All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at 	
www.standardandpoors.com. Use the Ratings search box located in the left 	
column.

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