TEXT - S&P affirms Gibraltar Industries 'BB-' rating

Wed Jan 16, 2013 10:35am EST

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Overview
     -- U.S. building products manufacturer Gibraltar Industries     
is seeking to issue $210 million senior subordinated notes to refinance existing
debt and pay associated fees and expenses.
     -- We are affirming our 'BB-' corporate credit rating on Gibraltar. We 
are assigning our 'BB-' issue-level rating to the proposed notes. The recovery 
rating is '3'.
     -- The stable outlook reflects our expectation that Gibraltar's credit 
metrics will remain consistent with our view of the rating, which allows for 
the company to pursue its acquisition-driven growth strategy while maintaining 
leverage below 4x. 

Rating Action
On Jan. 16, 2013, Standard & Poor's Ratings Services affirmed its 'BB-' 
corporate credit rating on Buffalo, N.Y.-based Gibraltar Industries Inc. The 
rating outlook is stable.

We also assigned a 'BB-' issue-level rating to the company's proposed $210 
million senior subordinated notes. The recovery rating on the proposed notes 
is '3', indicating our expectation for meaningful (50% to 70%) recovery in the 
event of payment default under our default scenario. 

Rationale
The ratings on Gibraltar Industries reflect Standard & Poor's view of the 
company's "weak" business risk profile and "significant" financial risk 
profile. Our business risk profile considers the building products 
manufacturer's dependence on cyclical residential, industrial, and 
construction end markets; high customer concentration; and exposure to 
volatile raw materials costs. These factors are modestly offset by the 
company's good position in niche markets and highly variable cost structure. 
The financial risk assessment incorporates our view that the company will 
maintain leverage below 4x and "strong" liquidity while continuing to pursue 
an acquisitive growth strategy. Gibraltar Industries is a leading 
manufacturer, processor, and distributor of products for the building, 
highway, and bridge construction markets. The company's strategy is to target 
high market share opportunities in niche products and be the low-cost provider 
in these markets. 

Our baseline scenario assumes Gibraltar's EBITDA will approximate $82 million 
in 2012, compared with $75 million in 2011. Our anticipated EBITDA growth in 
2012 reflects the incremental benefits associated with completed acquisitions. 
In 2013, our economists predict a pickup in residential construction markets 
which, in addition to moderate expansion in the infrastructure segment, should 
result in EBITDA of about $89 million. Key assumptions to our 2013 EBITDA 
forecast include:
     -- New housing starts are projected to be about 990,000 units in 2013, up 
27% from 2012, and may further improve to 1.3 million units in 2014. 
     -- We expect nonresidential construction end-markets to grow in the low 
single digits in 2013 and further improve in 2014.
     -- Margin improvement reflects ongoing recovery in residential 
construction end markets, cost reductions,  and contribution from the 
infrastructure business line.

The EBITDA forecast reflects our view that the cyclical diversity afforded by 
the comparatively stable and slightly higher margin infrastructure business 
segment will lead to Gibraltar's EBITDA margins exceeding 10%. Key risks to 
our earnings forecast include a reversal of the expected recovery in housing 
and commercial construction activity and significant steel price fluctuations. 
We believe raw materials--including steel--represent more than 45% of some 
product costs. 

Debt (including adjustments for operating leases and pensions) was about $240 
million on Sept. 30, 2012, unchanged from Dec. 31, 2011. The proposed 
refinancing is anticipated to result in minimal changes to the company's 
prospective debt level. Given the modest EBITDA growth expected over the next 
12 to 18 months, we anticipate leverage metrics improving to below 3x over 
this period, compared with 3.3x on Sept. 30, 2012. Furthermore, we anticipate 
funds from operations (FFO) to debt will approach 30%, compared with 21% on 
Sept. 30, 2012. We believe these metrics are consistent with the significant 
financial risk profile given our expectation that management will continue to 
pursue an acquisitive growth policy. Our ratings incorporate our view that the 
company would fund any acquisitions consistent with our view of its 
significant financial risk. 

Liquidity
We assess Gibraltar's liquidity as strong. Relevant aspects and assumptions in 
the company's liquidity profile include:
     -- Sources of liquidity will exceed uses by 1.5x or more over the next 
couple of years;
     -- Liquidity sources will continue to exceed uses, even if forecasted 
EBITDA were to decline 30%; and
     -- Compliance with financial maintenance covenants would survive a 30% 
drop in forecasted EBITDA without the company breaching covenant test measures.

As of Sept. 30, 2012, total liquidity was $211 million, including $71 million 
in cash and $140 million of availability on Gibraltar's $200 million 
asset-based lending (ABL) facility due 2016, after accounting for $14 million 
of letters of credit. We do not expect the proposed transaction to affect the 
company's liquidity position. Availability under the ABL facility is subject 
to a borrowing base of eligible receivables and inventory, which will 
fluctuate throughout the year because of seasonal working capital changes and 
a fixed-asset advance. Gibraltar must maintain a fixed-charge coverage ratio 
over 1.25x. We believe the company will have a strong EBITDA cushion of at 
least 30% for its fixed-charge covenant.

The company has demonstrated a disciplined approach to managing working 
capital, reducing its inventory to about 60 days out from highs of about 90 
days. Although the building products business' seasonality results in some 
fluctuation of working capital, we expect the company to continue managing 
outflows in accordance with its financial policies. Based on our operating 
assumptions, annual free cash flow should approximate $30 million in 2013 as 
capital expenditures increase to about $20 million from recent maintenance 
spending of about $17 million. In addition, we expect any potential 
acquisitions or shareholder rewards will not negatively impact the company's 
financial risk profile. The company has no significant debt maturities in the 
next few years and the proposed refinancing would further extend the maturity 
profile of the company's debt. 

Recovery analysis
The rating on Gibraltar's proposed $210 million senior subordinated notes is 
'BB-', same as the corporate credit rating. The recovery rating on the 
proposed notes is '3', indicating our expectation for meaningful (50% to 70%) 
recovery in the event of payment default under our default scenario. For the 
complete recovery analysis, see Standard & Poor's recovery report on Gibraltar 
Industries Inc., to be published shortly on RatingsDirect. 

Outlook
The rating outlook is stable, reflecting our belief that Gibraltar's credit 
measures will remain consistent with recent levels and the 'BB-' corporate 
credit rating, despite weak residential and nonresidential markets. We believe 
leverage will stay below 4x, even after giving consideration to the company's 
acquisition-driven growth strategy. Moreover, our outlook incorporates the 
company's strong liquidity position, favorable debt maturity profile, good 
expected cushion regarding its fixed-charge covenant, and ability to generate 
modest free cash flow. 

We could lower the rating if credit measures weakened from current levels such 
that leverage was likely to be maintained between 4x and 5x. This could occur 
if the recovery in residential and nonresidential end markets reverses course 
or if the company cannot pass through raw material costs following a decline 
in demand. We could downgrade Gibraltar if the company pursued a more 
aggressive financial policy regarding its acquisition growth strategy. 

Based on our view of the company's weak business risk profile and acquisition 
driven growth strategy, an upgrade is viewed as unlikely in the next year. 

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

Temporary contact numbers: Gayle M Bowerman, 646-634-8674; Tobias Crabtree, 
646-342-6482

Ratings List
Ratings Affirmed
Gibraltar Industries Inc.
 Corporate Credit Rating                BB-/Stable/--      
 Subordinated                           BB-                
  Recovery Rating                       3                 

New Ratings
Gibraltar Industries Inc.
 Subordinated
  US$210 mil nts                        BB-                
   Recovery Rating                      3
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