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