TEXT - S&P cuts Guardian Industries rating to BBB-plus
(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)
DAVOS, Switzerland - Central banks have done their best to rescue the world economy by printing money and politicians must now act fast to enact structural reforms and pro-investment policies to boost growth, central bankers said on Saturday.