TEXT-S&P cuts Martin Marietta Materials ratings to 'BBB'

Wed Aug 1, 2012 11:20am EDT

Overview
     -- We believe near-term demand growth for U.S.-based aggregates producer 
Martin Marietta Materials Co. will remain sluggish, resulting in lower profits 
and credit measures that are more consistent with a lower rating during the 
next few years.
     -- In addition, Martin Marietta's willingness to assume greater debt 
leverage in an attempt to acquire Vulcan Materials Co. reflects somewhat more 
aggressive financial risk taking, in our view.
     -- We are lowering our ratings on Martin Marietta, including the 
corporate credit and senior unsecured debt ratings, to 'BBB' from 'BBB+'. All 
ratings were removed from CreditWatch negative.
     -- The stable outlook reflects our assessment that Martin Marietta's 
credit measures will remain in a relatively narrow range over the next two 
years as aggregates demand appears to have stabilized at current levels. 

Rating Action
On Aug. 1, 2012, Standard & Poor's Ratings Services lowered its ratings, 
including its corporate credit and senior unsecured debt ratings, on Raleigh, 
N.C.-based Martin Marietta Materials Co. to 'BBB' from 'BBB+'. The
outlook is stable.

We removed all the ratings from CreditWatch were they were placed with 
negative implications on Dec. 13, 2011.

Rationale
The downgrade and CreditWatch removal reflects our expectation that aggregates 
demand in the U.S., driven largely by Federal and State infrastructure 
spending, commercial, and new home construction, will remain at steady, but 
historically low, volumes over the next two years. We expect this will result 
in credit measures for Martin Marietta remaining more consistent with a 'BBB' 
rating. In addition, the downgrade reflects Martin Marietta's willingness to 
assume greater financial risk as demonstrated by its recent bid, withdrawn as 
a result of a court order, to acquire larger competitor Vulcan Materials Co. 
(BB/Stable/--), which would have resulted in a significant increase in debt 
leverage. Our view of Martin's financial risk policy is consistent with that 
of a low investment-grade rating. Our ratings and outlook do not incorporate 
meaningful acquisition activity. However, we would reassess our ratings and 
outlook should Martin resume its bid for Vulcan Materials Co., when permitted, 
or if it pursued a similar sized acquisition or other business combination. 

Our 'BBB' corporate credit rating reflects our assessment of Martin's "strong" 
business risk marked by a well-established position in the highly fragmented 
U.S. aggregates industry, good operating margins, pricing stability, 
geographic sales diversity within the U.S., and consistently positive cash 
flows. These strengths are partially offset by participation in highly 
cyclical and competitive construction markets, exposure to volatile energy 
costs and ongoing low levels of U.S.-based construction activity. We view 
Martin's financial risk as "significant", reflecting good operating cash flow 
generation even through periods of low aggregates demand, adequate liquidity, 
and prospects for meaningfully strengthened earnings when U.S. construction 
markets fully recover. Offsetting these strengths are the risks of a somewhat 
more aggressive financial policy toward debt-financed acquisitions, still-weak 
construction markets, and cyclical demand for aggregates.

The company derives more than 50% of its total aggregates volumes from highway 
and other public infrastructure projects, which is marked by consistent 
spending despite constrained state budgets. The recent enactment of a new 
27-month Federal highway bill at close to current spending levels will likely 
provide more certainty for project funding over the next two years, but, in 
our view, will not result in any material increase in aggregates demand. We 
expect only modest growth in aggregates demand from the commercial and 
residential construction markets, which are less aggregates intensive than 
road and infrastructure repair and construction.

Under our baseline scenario, we expect mid-single digit sales growth in 2012 
and 5% sales growth in 2013. We expect EBITDA to improve to $400 million by 
2013, compared with its current $$380 million to $390 million. Key assumptions 
to our baseline scenario include:

     -- Flat federal highway appropriations and only modest growth in other 
construction activity;
     -- Volume growth of 2% to 3% and similar growth in pricing in 2012;
     -- Low single digit price and volume increases in 2013; and
     -- Stable operating margins.

Risks to our forecast included an unexpected decline in aggregates demand 
potentially caused by a recessionary pressures and a pull back in general 
construction activity in the U.S. Upside risks to our forecast could occur due 
to the high operating leverage in Martin Marietta's business. For example, we 
estimate that EBITDA could increase significantly to more than $500 million if 
volumes increased to the 175 million to 180 million ton range. This level 
would still be well below Martin Marietta's peak tonnage of about 205 million 
tons in 2006. However, given the current state of construction markets and 
Federal and State highway spending levels, we do not foresee this type of 
growth until 2015 or beyond.

Based on our EBITDA assumptions, we expect Martin Marietta will post funds 
from operations (FFO) of about $250 million, resulting in FFO to debt of about 
20%. In addition, we expect the company to maintain leverage (after adding 
back expenses associated with the failed Vulcan bid) at about 3.6x by the end 
of 2012. We consider these metrics to be more in-line with the 'BBB' rating 
given our view of its strong business risk profile. Assuming no debt funded 
acquisition or share repurchase activity, combined with modest debt reduction, 
we would expect leverage to decline to the 3.0x to 3.25x and FFO to debt to 
increase to about 25% by the end of 2013.

Liquidity
Our short-term rating on Martin Marietta is 'A-2', and we view the company's 
liquidity to be adequate. Our liquidity assessment is based on the following 
factors and assumptions:
     -- We expect the company's liquidity sources (including cash, funds from 
operations, and availability under credit facilities) over the next 24 months 
to exceed its uses by more than 1.2x. 
     -- In our analysis, we assumed liquidity of about $650 million over the 
next 12 months, consisting of cash, FFO and availability under its credit 
facilities. We estimate total uses in 2012 of approximately $300 million, 
including about $150 million in capital expenditures and $75 million in 
dividends. 
     -- Near-term debt maturities are minimal until the company's revolving 
credit and term loan facility matures in 2015.
     -- Even if EBITDA declines by 15%, we believe sources would exceed uses 
by 1.2x.
 
Martin Marietta's credit agreement includes a total leverage covenant of 3.95x 
trailing-12-month EBITDA, with the ratio stepping down to 3.75 on Sept. 30, 
2012, and returning to its prior level of 3.5x on Dec. 31, 2012. We expect 
Martin to maintain at least 15% EBITDA cushion in this covenant.

For 2012, we expect Martin Marietta will produce cash flow from operations of 
about $275 million for 2012, which is more than sufficient to fund capital 
expenditures of about $150 million and dividends of about $75 million 
annually. We expect similar cash flow, capital expenditures, and dividend 
levels for 2013. We do not expect any meaningful share repurchase activity 
until markets recover more fully.

Outlook
The rating outlook is stable. We expect Martin Marietta to maintain credit 
measures which support the 'BBB' rating despite low levels of aggregates 
demand given Martin's healthy operating margins and good cash flow. We believe 
financial results for year end 2012, adjusted for the non-recurring expenses 
of the attempted Vulcan acquisition, will result in adjusted leverage of about 
3.6x and FFO to debt of about 20%.

For 2013, we expect Martin Marietta will dedicate free cash flow to reduce 
debt balances. As a result, even in a scenario of flat volumes, total leverage 
would improve to between 3.0x and 3.25x. 

Our rating does not incorporate a renewed bid for Vulcan Materials once Martin 
is permitted to do so. However, should Martin undertake a renewed effort to 
acquire Vulcan (or another similarly sized acquisition), it is likely we would 
place the ratings under review for further downgrades. 

We could also take a negative rating action if earnings deteriorate materially 
from current levels, causing credit measures to worsen with adjusted leverage 
exceeding 4x on a sustained basis. This could occur if volumes unexpectedly 
fell below the 110 million ton level and fuel prices increased substantially 
from current levels, causing adjusted EBITDA to fall to below $325 million.

Given our view of Martin's willingness to assume more financial risk, and that 
aggregate volumes are not likely to increase substantially over the next two 
years, we would view a positive rating action as unlikely in the near term. 
Also, for an upgrade to occur, our assessment of Martin's financial risk 
profile would need to be consistent with a higher investment grade rating, 
requiring prudent levels of leverage with regard to any substantial 
acquisition or future share repurchase activity.

However, assuming a more conservative financial risk profile, we could 
consider an upgrade if Martin's sales recovered more quickly than expected 
resulting in increased size and operating income enabling Martin Marietta to 
reduce total leverage to under 2.5x on a sustained basis. For this to occur, 
we think Martin's aggregates volumes would have to exceed 175 million tons on 
an annual basis, which, along with low single-digit pricing growth, would 
result in EBITDA in excess of $550 million.  

Related Criteria And Research
     -- Liquidity Descriptors For Global Corporate 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 
     -- Corporate Ratings Criteria 2008, published April 15, 2008.
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Downgraded; Off CreditWatch; Outlook Stable
                                        To                 From
Martin Marietta Materials Inc.
 Corporate Credit Rating                BBB/Stable/A-2     BBB+/Watch Neg/A-2
 Senior Unsecured                       BBB                BBB+/Watch Neg

Rating Affirmed; Off CreditWatch
                                        To                 From
Martin Marietta Materials Inc.
 Commercial Paper                       A-2                A-2/Watch Neg

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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