Sept 6 (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
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
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.