TEXT-S&P puts NCI Building Systems ratings on watch negative

Tue May 8, 2012 2:59pm EDT

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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