TEXT-S&P removes Vulcan Materials from watch positive, affirms ratings

Mon Jun 11, 2012 10:30am EDT

Overview	
     -- U.S.-based aggregates producer Vulcan Materials Co. recently
prevailed in a series of Delaware Court decisions that barred Martin Marietta
from pursuing its bid and proxy contest for Vulcan Materials Co. for four
months.	
     -- We are affirming our ratings on Vulcan, including the 'BB' corporate 	
credit rating. We removed all the ratings from CreditWatch, where they were 	
placed on Dec. 13, 2011. 	
     -- The stable outlook reflects our expectation that credit measures will 	
improve modestly over the next 12-24 months toward levels more consistent with 	
a 'BB' rating while maintaining strong liquidity.	
	
	
Rating Action	
On June 11, 2012, Standard & Poor's Ratings Services affirmed its ratings, 	
including its 'BB' corporate credit rating, on Birmingham, Ala.-based Vulcan 	
Materials Co. At the same time, we removed all ratings from CreditWatch, where 	
they had been placed with positive implications, on Dec. 13, 2011. The rating 	
outlook is stable.	
	
Rationale	
The affirmation and CreditWatch removal on Vulcan reflect the withdrawal of 	
the unsolicited offer by higher-rated Martin Marietta to acquire Vulcan and 	
follows the Delaware Supreme Court ruling, which barred Martin Marietta from 	
pursuing its bid and proxy contest for Vulcan Materials Co. until mid 	
September. The ratings actions also reflect our view of a significantly 	
reduced likelihood of a merger between Vulcan and Martin Marietta in the near 	
term, which would have had a de-leveraging impact on Vulcan Materials. 	
	
The corporate credit rating on Vulcan reflects what Standard & Poor's 	
considers to be the company's "aggressive" financial risk; "satisfactory" 	
business risk; and "strong" liquidity, based on criteria. We view the 	
financial risk as aggressive given the company's current leverage of over 7x 	
(adjusted for leases and post-retirement expenses), which we consider to be 	
weak for the rating due to depressed EBITDA levels. The business risk profile 	
reflects aggregates' long-term favorable growth prospects, high barriers to 	
entry, and the supply and demand characteristics of the industry. The ratings 	
also reflect Vulcan's exposure to cyclical construction markets and very high 	
debt levels, offset somewhat by its leading position in the fragmented U.S. 	
aggregates market, presence in higher growth markets and the longer term need 	
for increased infrastructure spending. The ratings also incorporate our 	
expectation under our baseline scenario that credit measures will improve over 	
the next 12-24 months to levels more consistent with a 'BB' rating, given the 	
company's satisfactory business risk profile.	
	
Under on our baseline scenario for flat infrastructure spending and a very 	
gradual recovery in residential and nonresidential end markets, we expect 	
improvement in Vulcan's sales of about 5% in 2012, driven by aggregates price 	
growth of 1% to 2% and volume growth of 3% to 5%, driven by flat 	
infrastructure spending and a very modest recovery in residential 	
construction. We are forecasting that 2012 EBITDA could approximate $500 	
million or slightly higher, which is a significant improvement over the 2011 	
level of about $350 million, resulting in total debt (including lease and 	
retirement obligations) to EBITDA of just under 6x; with further improvement 	
to below 5x by the end of 2013 as the economy slowly recovers and Vulcan 	
pursues its previously announced plans to improve its profitability at current 	
volumes. Under this plan, we expect improvement of $25 million in 2012, $75 	
million in 2013, and the full $100 million by 2014. Key assumptions to our 	
2012 and 2013 forecast include:	
	
     -- U.S. housing starts remain well below historical average levels, 	
although improve to 720,000 in 2012 and 990,000 in 2013, up from 610,000 in 	
2011;	
     -- Nonresidential construction doesn't begin to recover until 2013;	
     -- A new, longer-term highway bill enacted sometime in 2013 and;	
     -- A slight increase in profit margins due to productivity improvements 	
and modestly better aggregates pricing.	
	
Key risks to our EBITDA forecast include further delayed enactment of a 	
longer-term highway bill, a stalled recovery in housing markets into 2013 or a 	
greater-than-expected increase in raw material costs, particularly diesel fuel 	
that the company is unable to offset with higher prices, which could result in 	
reduced profitability. 	
	
We continue to believe that Vulcan's results could significantly improve once 	
construction markets recover closer to historical averages. If construction 	
markets recover by 2013 and beyond, we estimate that EBITDA could recover to 	
historical levels of $750 million or more. However, for this to occur, the 	
company would need mid-single-digit pricing increases and double-digit 	
percentage volume growth over the next several years. Given the continued 	
growth in aggregates pricing, we believe Vulcan can achieve significantly 	
increased EBITDA with volumes still well below levels experienced at the last 	
peak, when the company shipped over 290 million tons of aggregates in a 12month
period. Such volume growth is not unprecedented for the industry, 	
particularly in past recovery periods from recessionary conditions. Current 	
volumes for Vulcan are running at about 150 million tons.	
	
Vulcan Materials is the nation's largest producer of construction aggregates, 	
primarily crushed stone, sand, and gravel. The company is also a major 	
producer of asphalt mix and ready-mixed concrete in certain states.	
	
Liquidity	
We view Vulcan's liquidity position as strong based on our liquidity criteria. 	
Our view of its liquidity includes the following expectations:	
	
     -- Liquidity sources (including availability under the company's $600 	
million asset based revolving credit facility due in 2016)	
     -- Liquidity sources will continue to exceed uses even if EBITDA were to 	
decline by up to 30%;	
     -- Compliance with financial maintenance covenants likely would survive a 	
30% drop in EBITDA without the company breaching covenant test measures for 	
the next two years.	
	
Vulcan is subject to a 65% debt to capital financial ratio covenant under its 	
bond indentures. As of March 31, 2012, the company had substantial cushion in 	
this ratio, calculated at about 43%, and we expect significant cushion to be 	
maintained in this measure.	
	
As of March 31, 2012, the company had about $192 million of cash and 	
substantial availability under its $600 million ABL facility due Dec. 15, 	
2016. The borrowing availability under this facility is determined by seasonal 	
levels of eligible accounts receivable and inventory. The ABL facility 	
contains a minimum fixed charge coverage ratio that is only applicable if use 	
exceeds 90% of the lesser of $600 million and the borrowing capacity. We 	
expect usage on the revolving credit facility to be modest and that the 	
company will maintain a fixed-charge coverage ratio above the minimum 	
requirement. 	
	
For 2012, we expect funds from operations (FFO) to be about $300 million, 	
capital expenditures about $125 million, and dividends of $5 million or less, 	
resulting in positive free cash flow of about $150 million (before potential 	
asset sales). For 2013, assuming our baseline scenario, we expect EBITDA of 	
just over $550 million, FFO of nearly $400 million and free cash flow of about 	
$175 million, after capital expenditures of $175 million.  	
	
We also note that Vulcan expects to generate net proceeds of approximately 	
$500 million from the sale of assets over the next 12 to 18 months. We expect 	
these planned asset sales to be made from non-core assets. Our strong 	
liquidity assessment takes these asset sales into account, but with the sales 	
taking place over 36 rather than 18 months. While use of these funds has not 	
yet been determined, it can provide the company with an opportunity to 	
de-leverage, which we would view favorably. However, returning this cash to 	
shareholders via share repurchases or increased dividends prior to achieving 	
significant improvement in credit measures could result in negative ratings 	
pressure.  	
	
Debt maturities are manageable, with about $135 million due in November 2012 	
and $140 million due in 2013.	
	
Recovery analysis	
For complete recovery analysis, please see our recovery report on Vulcan 	
Materials Co. to be published on RatingsDirect shortly after this report.	
	
Outlook	
The stable rating outlook reflects our expectation that Vulcan's credit 	
measures will improve modestly to about 6x by the end of 2012 and to 5x or 	
less by the end of 2013 as construction markets slowly recover and the company 	
pursues its previously announced plans to improve its profitability at current 	
volumes. We expect EBITDA of $500 million or more for 2012 and nearly $600 	
million for 2013.	
	
Our stable outlook also reflects our view that the company will maintain its 	
strong liquidity, which can be further enhanced by the company's plans to 	
generate net proceeds of approximately $500 million from asset sales.  	
	
We could take a negative rating action if Vulcan fails to show improvement in 	
its operating margins and results over the next year, such that leverage 	
remains near current elevated level of 7x, or if the company pursues an 	
aggressive dividend, share repurchase, or acquisition policy that prevents 	
improvement in credit measures. If debt leverage is above 6.25x as of Dec. 31, 	
2012, with little prospect for rapid improvement, it could result in a 	
negative rating action. 	
	
We currently consider a positive rating action unlikely in the near term, 	
given our expectation that the company's credit measures will remain somewhat 	
weak for the rating. However, we would consider a positive rating action if 	
residential and non-residential construction markets were to recover faster 	
than expected, or if Vulcan made quicker progress in improving EBITDA to $600 	
million or more or if Vulcan used the proceeds of its asset sales to de-lever, 	
reducing total adjusted debt to well below 3.0 billion such that debt leverage 	
trended to 5x or below.	
	
Related Criteria And Research	
     -- Criteria: Methodology And Assumptions: Liquidity Descriptors For 	
GlobalCorporate Issuers, Sept. 28, 2011	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Key Credit Factors: Business And Financial Risks In The Global 	
Building Products And Materials Industry, Nov. 19, 2008 	
Ratings List	
Ratings Affirmed; Off CreditWatch; Outlook Stable	
                                        To                 From	
Vulcan Materials Co.	
Legacy Vulcan Corp.	
 Corporate Credit Rating                BB/Stable/--       BB/Watch Pos/--	
	
Ratings Affirmed; Off CreditWatch	
Vulcan Materials Co.	
Legacy Vulcan Corp.	
 Senior Unsecured                       BB                 BB/Watch Pos	
   Recovery Rating                      3                  3	
	
	
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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