TEXT-S&P affirms Vulcan Materials 'BB' rating; outlook stable
Dec 14 () - Overview -- We expect U.S. aggregates producer Vulcan Materials Co.'s 2012 full-year EBITDA to fall short of our previous estimates despite improved operating results in the last four quarters, with leverage higher than our previous estimate of 6x. -- Vulcan seeks $500 million in after-tax proceeds from planned asset sales. While not yet determined, some or all of these proceeds may be utilized for additional debt reduction. -- We are affirming our ratings on Vulcan Materials, including our 'BB' long-term corporate credit rating. -- The outlook is stable and reflects our expectation for operating performance to improve under our baseline scenario for 2013, which, combined with some debt reduction, should result in improved leverage of 5.5x or less by the end of 2013. Rating Action On Dec. 14, 2012, Standard & Poor's Ratings Services affirmed its ratings, including the 'BB' long-term corporate credit rating, on Birmingham, Ala.-based aggregates producer Vulcan Materials Co. The outlook is stable. Rationale The affirmation of our 'BB' corporate credit rating on Vulcan is based on Standard & Poor's view of the company's "aggressive" financial risk; "satisfactory" business risk; and "strong" liquidity, based on our criteria. We view the financial risk as aggressive despite our estimate that year-end 2012 total debt/EBITDA leverage (adjusted for leases and post-retirement expenses) is likely to be in a range of 6.5x to 7x, which we view as weak for the rating. We are forecasting that 2012 EBITDA could approximate $500 million, which is about 10% below our prior expectation, but still a significant improvement over the 2011 level of about $350 million. The ratings also incorporate expectations under our baseline scenario that credit measures will improve over the next 12 to 24 months to levels more consistent with a 'BB' rating, given the company's satisfactory business risk profile. For 2013, we expect improvement in Vulcan's sales of about 5% from our baseline scenario, based on the following assumptions: -- Flat infrastructure (highway spending) given the current highway appropriations under Moving Ahead for Progress (MAP-21) bill. -- Private nonresidential construction grows modestly (about 3.6%) in 2013 after growing nearly 9% in 2012; -- U.S. housing starts remain well below historical average levels, but will increase to 1 million or more in 2013 as per Standard & Poor's economists forecast; and -- An increase in profit margins due to productivity improvements, cost cuts and modestly better aggregates pricing (up 2% to 5%). As a result, we think 2013 adjusted EBITDA (after our adjustments for pensions and leases) could approximate $550 million or slightly higher, resulting in improvement in leverage measures to 5.5x or lower by the end of 2013. Key risks to our EBITDA forecast include a stalled recovery in housing markets in 2013 or the risk of a new recession, which our economists estimate at a 15% to 20% probability. Vulcan has undertaken a program to achieve $500 million of after-tax proceeds from planned asset sales. While not yet determined, some or all of these proceeds may be utilized for additional debt reduction, which we would view as favorable to the rating. We continue to believe that Vulcan's results could significantly improve once construction markets recover closer to historical averages, due to the high operating leverage inherent in the aggregates business. If construction markets recover further by 2014 and beyond, we estimate that EBITDA could reach 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. The ratings on Vulcan also incorporate our view of the company's satisfactory business risk profile, reflecting 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. 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); and -- Liquidity sources will continue to exceed uses even if EBITDA were to decline by up to 30%, As of Sept. 30, 2012, the company had about $243 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 will be minimal and that the company will maintain a fixed-charge coverage ratio above the minimum requirement. The company is not subject to any other financial ratio covenants. For 2013, we expect funds from operations (FFO) to be about $300 million, capital expenditures about $150 million, and dividends of $5 million or less, resulting in positive free cash flow of about $150 million (before potential asset sales). 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 the next 24 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 $151 million due in 2013 and less than $1 million in 2014. Recovery analysis The issue-level ratings on Vulcan's senior unsecured notes is 'BB', the same as the corporate credit rating with a recovery rating of '3', indicating that investors could achieve meaningful recovery (50% to 70%) in the event of a default. For the complete recovery analysis, please see our recovery report on Vulcan published on June 15, 2012, on RatingsDirect. Outlook The stable rating outlook reflects our expectation that Vulcan's credit measures will improve to about 5.5x by the end of 2013 with opportunity for further debt reductions from asset sales and improved construction markets in 2014. We expect EBITDA of $500 million to $550 million for 2013 and $600 million or more for 2014 if construction markets continue to recover. The 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 $500 million of net proceeds from asset sales. We could take a negative rating action if Vulcan fails to show improvement in its results over the next year, such that leverage increases or fails to continue to trend downward to 5x or lower, or if the company pursues a more aggressive financial policy, such as using asset sale proceeds to fund increased dividend, share repurchases, or acquisitions prior to reducing leverage to levels more appropriate for a 'BB' rating (i.e., 3x to 4x). We consider a positive rating action unlikely in the near term, given our expectation that the company's credit measures will remain 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 significant debt reductions occurred from proceeds of Vulcan's asset sales, reducing total adjusted debt to well below 3.0 billion such that debt leverage trended to well below 5x with prospects for further improvement. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011. -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012 -- Key Credit Factors: Business And Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008 Ratings List Ratings Affirmed Vulcan Materials Co. Legacy Vulcan Corp. Corporate Credit Rating BB/Stable/-- Vulcan Materials Co. Legacy Vulcan Corp. Senior Unsecured BB Recovery Rating 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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