TEXT-S&P affirms Georgia Gulf Corp ratings, removes from watch
Overview -- Westlake Chemical Corp. has withdrawn its offer to acquire U.S. commodity chemical and building products maker Georgia Gulf Corp. -- We are affirming all our ratings on Georgia Gulf, including the 'BB-' corporate credit rating, and removing them from CreditWatch. -- The stable outlook indicates our expectation that credit measures will remain in a band appropriate for the ratings despite industry cyclicality and potentially sizable capital investment. Rating Action On May 8, 2012, Standard & Poor's Ratings Services affirmed all its ratings, including its 'BB-' corporate credit rating, on Atlanta-based Georgia Gulf Corp.. At the same time, we removed them from CreditWatch where we had placed them with positive implications on Jan. 17, 2012. The outlook is stable. Rationale Our rating actions on Georgia Gulf follow higher-rated Westlake Chemical Corp.'s (BBB-/Stable/--) withdrawal of its unsolicited offer to acquire Georgia Gulf. While the ratings on Georgia Gulf were on CreditWatch, we raised them based on its improved standalone credit quality. The ratings reflect our assessment of Georgia Gulf's business profile as "weak" and financial profile as "significant". Georgia Gulf's credit measures have strengthened significantly through earnings improvement and debt reduction since 2009, when it completed a debt restructuring that included a debt for equity exchange. As of March 31, 2011, total adjusted debt was about $620 million, with debt to EBITDA of about 2.5x and funds from operations (FFO) to debt of about 30%. We adjust debt to include capitalized operating leases as well as tax-effected postretirement, environmental, and asset retirement liabilities. At the current ratings, we expect FFO to debt to average 20% to 25%. As a result, there is cushion in the ratings for earnings and cash flow volatility, as well as seasonal and price-related working capital increases. The company should also be able to execute some debt-funded capital spending or acquisitions while maintaining credit quality. Based in Atlanta, Georgia Gulf is an integrated vinyls and building materials producer operating a primarily commodity business with some volatility in earnings and cash flow. Georgia Gulf is an integrated producer of PVC building and home improvement products, PVC resin, and aromatic chemicals, with trailing-12-month revenue of nearly $3.3 billion. It also sells caustic soda, a co-product resulting from its backward integration into chlorine, which is used in PVC production. Georgia Gulf is among the top four U.S. producers of PVC. It also benefits from favorable long-term demand growth prospects linked to economic output and the housing market, and a significant degree of backward integration into major inputs (like chlorine) and value-added PVC products. Relative to its competitors, it is also well forward-integrated into PVC end products (window and door components, siding, and pipe), mainly as a result of its 2006 acquisition of the Royal Group. Still, demand remains susceptible to cyclical downturns, and operating performance is vulnerable to large supply additions by competitors. PVC exports offset ongoing weakness in domestic demand, but depend at least partly on the continuation of low ethylene prices in North America and favorable exchange rates. During the past couple of years, better operating performance has resulted from volume gains and cost reductions. First-quarter 2012 performance bounced back from weak fourth-quarter 2011 levels, which had been affected by industry destocking, high raw material costs, and lower selling prices in some product categories. We expect the improvement to be sustainable based on current industry conditions and our expectation for modest global economic growth in 2012. Although return on capital improved after the debt restructuring and is currently above 10%, EBITDA margins remain low, at approximately 8%. During the next few years, we expect operating performance to continue to strengthen, given our outlook for continued economic growth and recovery in the U.S. housing market--a critical source of demand for the company's products. Key elements of our forecast include: -- Relatively flat EBITDA generation in 2012 compared with 2011. Although first-quarter 2012 results improved both sequentially and compared with the same quarter last year, we expect the company to experience increased operating costs and lower production in connection with a major chloralkali turnaround in the second quarter of 2012, as well as a modestly unfavorable impact from repricing ethylene supply contracts. -- A potential increase in the combined amount of capital spending and acquisitions ($138 million in 2011). This amount could rise significantly after 2012 if the company proceeds with plans to expand its chlorine integration (currently about 50%), but this could also materially increase profitability. -- A modest boost in U.S. housing starts in 2012, with accelerated improvement thereafter. -- Continued favorable U.S. natural gas costs. Liquidity Liquidity is "adequate" in our assessment. We expect the company's sources of funds to exceed uses by at least 1.2x over the next year. As of March 31, 2012, Georgia Gulf had $258 million available under its $300 million asset-based lending (ABL) revolving credit facility, which matures in 2016. It also had $39 million in cash balances. Liquidity typically dips early in the year, in connection with a seasonal working capital increase, and expands later in the year. The ABL is subject to a springing fixed-charge coverage covenant of 1.1x, which applies if excess availability is less than $45 million. We expect availability to remain well above this amount. Discretionary cash generation is likely to be modest and potentially negative if Georgia Gulf proceeds with a large chlorine expansion project. The company could also reinstate a modest dividend (it was suspended in 2009). The debt maturity profile is favorable, with the ABL maturing in 2016 and the company's sole note issue ($500 million) in 2017. Recovery analysis Georgia Gulf's senior secured debt is rated 'BB' (one notch higher than the corporate credit rating) with a recovery rating of '2'. This indicates our expectation for substantial (70% to 90%) recovery in the event of a payment default. For the complete recovery analysis, see our recovery report on Georgia Gulf published April 25, 2012. Outlook The outlook is stable. At the current ratings we expect Georgia Gulf's FFO to debt to average 20% to 25%. Despite industry cyclicality and potentially significant capital spending to expand chlorine capacity, we believe this performance level is sustainable based on favorable natural gas costs, prospects for North American construction markets to gradually strengthen, and our expectation that Georgia Gulf will use debt prudently to support modest growth initiatives in its core businesses. We could lower the ratings in the unlikely event that growth initiatives strain credit metrics beyond our expectations (resulting in FFO to debt below 20% with no prospects for improvement). Given Georgia Gulf's current business risk profile, FFO to debt would have to average above 30% for us to consider an upgrade. We view this as unlikely in the near term given the capital expansion that management is currently considering. Related Criteria And Research -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Key Credit Factors: Business And Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008 Ratings List Ratings Affirmed; Outlook Stable To From Georgia Gulf Corp. Corporate Credit Rating BB-/Stable/-- BB-/Watch Pos/-- Senior Secured BB BB/Watch Pos Recovery Rating 2 2 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.