TEXT - S&P cuts Guardian Industries rating to BBB-plus

Wed Dec 26, 2012 5:12pm EST

Related Topics

(The following statement was released by the rating agency)

Overview
     -- U.S.-based glass manufacturer Guardian Industries Corp. has disclosed 
it has sold a substantial minority stake to a subsidiary of Koch Industries 
Inc. (unrated; collectively Koch).
     -- Guardian also has completed a planned partial redemption and exchange 
of common shares resulting in a significant increase in leverage which is 
likely to weaken forecasted credit metrics over the next 12 to 18 months. 
     -- We are lowering our rating on Guardian Industries, Corp., including 
the corporate credit rating to 'BBB+' from 'A' to reflect the increase in 
leverage to about 3.8x.
     -- Our stable outlook is based on our expectation that Guardian's 
forecasted free cash flow will result in debt repayment with leverage 
declining to about 2.5x by the end of 2013.
Rating Action
On Dec. 26, 2012, Standard & Poor's Ratings Services lowered its corporate 
credit rating on Auburn Hills, Mich.- based Guardian Industries Corp. to 
'BBB+' from 'A'. At the same time, we lowered our short-term credit rating on 
the company to 'A-2' from 'A-1'. The outlook is stable. All ratings were 
removed from CreditWatch where they were place on Oct. 4, 2012, with negative 
implications.
Rationale
Our lowering of the corporate credit rating to 'BBB+' from 'A' follows the 
company's disclosure that it has completed a debt-financed redemption and 
exchange of common shares as well as the sale of a significant minority 
interest in the company to a subsidiary of Koch Industries Inc. As a result of 
the transactions, Guardian has significantly increased its debt burden such 
that debt to EBITDA (adjusted for operating leases and pension adjustments) 
increased to about 3.8x from the prior 1.7x. Guardian does not disclose 
financial information publicly.

Our ratings and outlook for Guardian also reflect our assessment of the 
company's "strong" business risk profile which includes the company's wide 
global footprint, diverse glass product offerings and low-cost manufacturing 
operations. These strengths are partially offset by price and demand 
volatility caused by cyclical construction and auto glass markets. We assess 
the company's financial risk profile as "intermediate" reflecting the large 
increase in transaction-related debt and our expectations that leverage will 
decline from 3.8x to about 2.5x, levels consistent with the intermediate 
financial risk profile, by the end of 2013. 

For 2013, we expect Guardian will improve EBITDA to bring it more in line with 
historical levels. The company will accomplish this through internal operating 
improvements, the absence of one-time operating interruptions at several 
plants, and because of gradually recovering construction and automotive 
markets in the U.S., which we think will offset continuing recessionary 
pressures in Europe. Our economists are forecasting 1.05 million housing 
starts in 2013 and 1.34 million in 2014, which should help the company's 
building products and glass businesses. Our economists also forecast over 15 
million in new vehicles for 2013 and 2014, as well as a 3.6% increase in 
nonresidential construction for 2013 followed by 6% growth in 2014. As a 
result, our baseline scenario projects Guardian will be able to reduce 
leverage to about 2.5x by the end of 2013 while maintaining FFO to debt of 30% 
or higher. Assuming the company meets its targets and dedicates free cash flow 
to debt repayment as planned, we think leverage can be below 2x by the end of 
2014 with FFO to debt reaching 40%, which if achieved, would be reflective of 
a "modest" financial risk profile as previously maintained by the company. 
Risks to our forecast include further deterioration in European economic 
conditions, a stalled housing recovery in the U.S. and a deterioration in 
glass prices.

Liquidity
Our 'A-2' short-term rating on Guardian incorporates our assessment of the 
company's liquidity as "strong". Our view of the company's liquidity 
incorporates the following:

     -- We expect liquidity sources to exceed uses by at least 1.5x over the 
next year and at least 1x in year two. We expect that liquidity sources will 
continue to exceed uses, even if forecasted EBITDA were to decline by 30%. 
     -- Compliance with financial maintenance covenants likely would survive a 
30% drop in forecasted EBITDA, without the company breaching covenant test 
measures. 
     -- In our assessment, the company has solid relationships with its banks 
and a generally high standing in the credit markets.

We expect Guardian will maintain excess cash balances of several hundred 
million at all times. In addition, Guardian has a $600 million revolving 
credit facility that matures in November 2017. We expect that discretionary 
free cash flow after capital expenditures will be positive over the next 12 
months. We expect capital expenditures to decrease in 2013 as the company has 
completed its new plant in Russia as well as other growth initiatives. In our 
view, debt maturities are manageable over the next several years. 

We do not expect significant acquisition activity (historically Guardian has 
expanded organically as opposed to acquisitions). Nor do we expect any 
meaningful distributions to shareholders for the foreseeable future given the 
recent large redemption of shares and more restrictive terms of the company's 
agreements with Koch.

Outlook
Our stable rating outlook incorporates our expectation that post-transaction 
leverage for Guardian should improve as a result of better operating results 
in 2013, coupled with post-transaction debt repayment from free cash flow. We 
expect Guardian to rapidly bring credit measures in line with the current 
rating. Specifically, we expect debt to EBITDA leverage to improve well below 
3x and FFO to debt in the 30% area in 2013. Our improved 2013 earnings outlook 
reflects higher margin glass production capabilities coming on line, expanded 
capacity in high-growth regions and a continuing gradual recovery of U.S. 
construction markets offsetting anticipated weakness in European end markets. 
We think further de-leveraging could take place in 2014 with debt to EBITDA 
improving to about 2x and FFO to debt to 40% by the end of 2014, levels that 
would be more in line with a "modest" financial risk profile and strong for 
the current rating.
 
We could downgrade the company if operating results do not improve as we 
expect, due to renewed recessionary pressures in Europe or the U.S., delaying 
debt reduction and causing leverage to stay above 3x in 2013. 

We could upgrade the company if markets improved more quickly than we expect, 
allowing for accelerated debt repayment and leverage that trends under 2x in 
2013. We also could raise our rating to incorporate implied support resulting 
from the substantial ownership of Koch in Guardian once the potential of 
Koch's financial, strategic and managerial influences are more fully 
determined. While Koch Industries Inc. is unrated, it has certain highly-rated 
subsidiaries, including Koch Resources LLC (AA-/Stable/A-1+) and 
Georgia-Pacific LLC (A/Stable/--).

Related Criteria And Research
     -- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 
2012 
     -- Methodology: Short-Term/Long-Term Ratings Linkage Criteria For 
Corporate And Sovereign Issuers, May 15, 2012
     -- Principles of Credit Ratings, Feb. 16, 2011
     -- Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
     -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008



Ratings List
Downgraded; Off CreditWatch; Outlook Stable
                                        To                 From
Guardian Industries Corp.
 Corporate Credit Rating                BBB+/Stable/A-2    A/Watch Neg/A-1

Guardian Europe S.A.R.L.
 Commercial Paper                       A-2                A-1/Watch Neg

 (Caryn Trokie, New York Ratings Unit)
FILED UNDER:
Comments (0)
This discussion is now closed. We welcome comments on our articles for a limited period after their publication.