TEXT-S&P puts NCI Building Systems ratings on watch negative
Overview -- U.S.-based NCI Building Systems Inc. has entered into an agreement to acquire insulated panel supplier Metl-Span for $145 million in cash and has reached an agreement to eliminate its quarterly dividend obligation on its preferred shares. -- NCI has amended and extended its asset-based lending facility (ABL) and secured a new fully committed term loan that will be used, together with cash on hand, to fund the acquisition and refinance existing debt. -- We are placing our ratings on NCI, including its 'B' corporate credit rating, on CreditWatch with negative implications. -- The negative implications reflect our view that debt leverage is likely to increase as a result of this transaction to levels that are weak for the current 'B' rating. Rating Action On May 8, 2012, Standard & Poor's Rating Services placed its ratings, including its 'B' long-term corporate credit rating, on Houston-based metal building and components manufacturer and distributor NCI Building Systems on CreditWatch with negative implications. Rationale The CreditWatch listing follows NCI's announcement of an agreement to acquire insulated panel supplier Metl-Span for $145 million in cash. NCI plans to enter into a new credit facility to fund the acquisition and refinance its $128 million bank term loan. NCI also announced that it has reached agreement with Clayton, Dubilier & Rice and affiliates (CD&R), the holders of NCI's convertible preferred shares, to eliminate NCI's quarterly dividend obligation on the preferred shares Based on preliminary information, we expect NCI's financial leverage to increase as a result of the incremental acquisition-related debt. Pro forma the acquisition, we estimate that total debt/EBITDA leverage, adjusted for operating leases and nearly $350 million of convertible preferred equity, could reach about 7x, which we would consider to be weak for the current rating given NCI's "weak" business risk profile. Partially mitigating the increase in leverage is increased sales, vertical integration and diversity, as well as potential synergies that will result from the Metl-Span acquisition. Also, NCI plans to eliminate its quarterly dividend obligation on its preferred shares. CreditWatch We expect to resolve the CreditWatch placement within the next 90 days or upon the transaction's completion. In resolving the CreditWatch listing, Standard & Poor's will meet with management to review its operating plans and strategies post acquisition. We will also assess the company's financial policies, liquidity and capital structure pro forma for the acquisition. We could affirm or lower ratings based on our assessment of the higher debt leverage, liquidity, and financial policies post-transaction. If a downgrade were to occur, it would likely be limited to one notch. Related Criteria And Research -- Use Of CreditWatch And Outlooks, Sept. 14, 2009 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Standard & Poor's Revises Its Approach To Rating Speculative-Grade Credits, May 13, 2008 -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Ratings Placed On CreditWatch To From NCI Building Systems Inc. Corporate Credit Rating B/Watch Neg/-- B/Stable/-- Senior Secured B+/Watch Neg B+ 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.
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