TEXT-S&P affirms Georgia Gulf Corp ratings, removes from watch

Tue May 8, 2012 1:30pm EDT

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 has withdrawn its offer to acquire U.S. 	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.