RPT-Fitch Upgrades USG's IDR to 'B'; Outlook Stable
Sept 6 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has upgraded the ratings of USG Corporation (NYSE: USG), including the company's Issuer Default Rating (IDR) to 'B' from 'B-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade reflects USG's improving profitability and credit metrics this year and the expectation that this trend continues through at least 2014. The rating for USG also reflects the company's leading market position in all of its core businesses, strong brand recognition, its large manufacturing network and sizeable gypsum reserves. Risks include the cyclicality of the company's end-markets, excess capacity currently in place in the U.S. wallboard industry, volatility of wallboard pricing and shipments and, although improving, the company's still high leverage position.
The Stable Outlook reflects Fitch's expectation that demand for USG's products will continue to grow during the remainder of 2013 and into 2014 as the housing market maintains its moderate recovery and commercial construction activity improves from cyclical lows.
The rating and Stable Outlook also incorporates USG's solid liquidity position.
IMPROVING FINANCIAL RESULTS AND CREDIT METRICS
Revenues for the first half of 2013 increased 9.4% to $1.73 billion compared with $1.58 billion during the first half of 2012. More importantly, operating profit (excluding restructuring and impairment charges) advanced 133% to $126 million during the first two quarters of 2013 compared with $54 million during the same period last year, reflecting the company's strong operating leverage.
USG's Fitch-calculated leverage has improved significantly to 7.1x for the LTM period ending June 30, 2013 compared with 8.75x at year-end 2012 and 35.4x at the end of 2011. Fitch expects further improvement in leverage, with debt to EBITDA projected to be below 6x by year-end 2013. USG also has further opportunity to lower its leverage levels by calling $400 million of convertible sr. unsecured notes, which would likely be converted into equity. USG is currently evaluating if and how much of the convertible notes it will call while still preserving its roughly $2 billion of net operating loss carryforwards.
Interest coverage also increased to 1.6x for the June 30, 2013 LTM period from 1.3x in 2012 and 0.3x in 2011. Fitch expects the interest coverage ratio will settle at around 2x at the conclusion of 2013. USG's interest coverage ratio could also improve further if the convertible notes are converted into equity as this debt carries a 10% coupon.
STRONG LIQUIDITY POSITION
As of June 30, 2013, USG had $813 million of liquidity comprised of $416 million of cash, $113 million of short-term marketable securities, $25 million of long-term marketable securities and $259 million of borrowing availability under its U.S. and Canadian credit facilities. In addition, the company's consolidated joint ventures (JV) in Oman have two credit facilities totaling $36 million, of which $33 million was available to the JV for term loan borrowings. Fitch expects USG's liquidity will remain healthy during the next 12 - 18 months.
Fitch currently projects USG's overall liquidity will be between $775 million and $825 million at the end of 2013 and will remain above $700 million at the end of 2014. USG has no major debt maturities until 2016, when $500 million of senior notes become due.
CYCLICALITY OF END MARKETS
USG markets its products primarily to the construction industry, with approximately 24% of the company's 2012 net sales directed toward new residential construction, 22% derived from new non-residential construction, 52% from the repair and remodel segment (commercial and residential) and 2% from other industrial products.
Fitch's housing estimates for 2013 follow: Single-family starts are forecast to grow 18.3% to 633,000, while multifamily starts expand about 19% to 292,000; single-family new home sales should increase approximately 22% to 448,000 as existing home sales advance 7.5% to 5.01 million. Total housing starts are projected to expand 18% in 2014 to 1.1 million as single-family starts advance 22% and multi-family starts gain 9%. New home sales should improve 24% while existing home growth should moderate to 5%.
Fitch projects home-improvement spending will increase 4% in 2013 following an estimated 5.4% improvement during 2012. Growth patterns in the intermediate term are likely to be below what the industry experienced during the 1999 to 2006 periods due to slower growth in the U.S. economy and only moderately improved housing market conditions. Growth in this segment will also be restrained by tight bank lending standards, which will make it difficult for homeowners to use credit to finance large remodeling projects. As such, Fitch expects spending for big-ticket remodeling projects to lag the overall growth in the home improvement sector. Fitch projects home-improvement spending will advance 5% in 2014.
The fundamentals of the U.S. commercial real estate (CRE) continue to improve at a moderate pace following the recent economic recession. CRE vacancy rates are falling modestly and rents are moderately rising as the economy slowly advances.
Fitch currently expects continued, positive property-level fundamentals across most asset classes. Fitch expects new construction activity to remain positive during the remainder of the year and into 2014 despite weak growth in the U.S. economy, lingering problems of key European economies, and continued challenges in the CRE capital markets. Fitch projects private nonresidential construction will grow 2% in 2013 and 5% in 2014.
WALLBOARD PRICING STRATEGY HOLDING UP
At the end of 2011, major wallboard manufacturers announced that they were eliminating the practice of job quotes. In the past, job quotes provided pricing protection for customers, particularly for their large projects. However, this practice limited the realization of price increases implemented by manufacturers.
During the past two years, major manufacturers announced an annual one-time price increase effective at the beginning of 2012 and 2013. The pricing increases were realized in 2012 and appear to be holding so far in 2013. USG's average U.S. wallboard price grew 17.4% yoy during 1Q'13 and advanced 16.4% yoy during 2Q'13.
Future ratings and Outlooks will be influenced by broad economic and construction market trends, as well as company specific activity, particularly free cash flow trends and liquidity.
Additional positive rating actions may be considered if the company shows further improvement in financial results and operating metrics, including debt to EBITDA levels trending at or below 4x and interest coverage above 3x, while maintaining at least $500 million of liquidity.
On the other hand, a negative rating action may be considered if the projected improvement in the construction market dissipates, leading to revenue declines in the 15% - 20% range, EBITDA margins in the low to mid-single digit range and total liquidity falling below $300 million.
Fitch has upgraded the following ratings for USG:
--Long-term IDR to 'B' from 'B-';
--Secured bank credit facility to 'BB/RR1' from 'BB-/RR1';
--Senior unsecured guaranteed notes to 'BB-/RR2' from 'B+/RR2'.
--Senior unsecured notes to 'B/RR4' from 'B-/RR4';
--Convertible senior unsecured notes to 'B/RR4' from 'B-/RR4'.
Fitch's Recovery Rating (RR) of 'RR1' on USG's $400 million secured revolving credit facility indicates outstanding recovery prospects for holders of this debt issue. Fitch's 'RR2' on USG's unsecured guaranteed notes indicates superior recovery prospects. (Currently, $659 million of unsecured notes are guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries.) Fitch's 'RR4' on USG's senior unsecured notes that are not guaranteed by the company's subsidiaries indicates average recovery prospects for holders of these debt issues. Fitch applied a going concern valuation analysis for these RRs.