-- We believe near-term demand growth for U.S.-based aggregates producer
Martin Marietta Materials Co. will remain sluggish, resulting in lower profits
and credit measures that are more consistent with a lower rating during the
next few years.
-- In addition, Martin Marietta's willingness to assume greater debt
leverage in an attempt to acquire Vulcan Materials Co. reflects somewhat more
aggressive financial risk taking, in our view.
-- We are lowering our ratings on Martin Marietta, including the
corporate credit and senior unsecured debt ratings, to 'BBB' from 'BBB+'. All
ratings were removed from CreditWatch negative.
-- The stable outlook reflects our assessment that Martin Marietta's
credit measures will remain in a relatively narrow range over the next two
years as aggregates demand appears to have stabilized at current levels.
On Aug. 1, 2012, Standard & Poor's Ratings Services lowered its ratings,
including its corporate credit and senior unsecured debt ratings, on Raleigh,
N.C.-based Martin Marietta Materials Co. to 'BBB' from 'BBB+'. The
outlook is stable.
We removed all the ratings from CreditWatch were they were placed with
negative implications on Dec. 13, 2011.
The downgrade and CreditWatch removal reflects our expectation that aggregates
demand in the U.S., driven largely by Federal and State infrastructure
spending, commercial, and new home construction, will remain at steady, but
historically low, volumes over the next two years. We expect this will result
in credit measures for Martin Marietta remaining more consistent with a 'BBB'
rating. In addition, the downgrade reflects Martin Marietta's willingness to
assume greater financial risk as demonstrated by its recent bid, withdrawn as
a result of a court order, to acquire larger competitor Vulcan Materials Co.
(BB/Stable/--), which would have resulted in a significant increase in debt
leverage. Our view of Martin's financial risk policy is consistent with that
of a low investment-grade rating. Our ratings and outlook do not incorporate
meaningful acquisition activity. However, we would reassess our ratings and
outlook should Martin resume its bid for Vulcan Materials Co., when permitted,
or if it pursued a similar sized acquisition or other business combination.
Our 'BBB' corporate credit rating reflects our assessment of Martin's "strong"
business risk marked by a well-established position in the highly fragmented
U.S. aggregates industry, good operating margins, pricing stability,
geographic sales diversity within the U.S., and consistently positive cash
flows. These strengths are partially offset by participation in highly
cyclical and competitive construction markets, exposure to volatile energy
costs and ongoing low levels of U.S.-based construction activity. We view
Martin's financial risk as "significant", reflecting good operating cash flow
generation even through periods of low aggregates demand, adequate liquidity,
and prospects for meaningfully strengthened earnings when U.S. construction
markets fully recover. Offsetting these strengths are the risks of a somewhat
more aggressive financial policy toward debt-financed acquisitions, still-weak
construction markets, and cyclical demand for aggregates.
The company derives more than 50% of its total aggregates volumes from highway
and other public infrastructure projects, which is marked by consistent
spending despite constrained state budgets. The recent enactment of a new
27-month Federal highway bill at close to current spending levels will likely
provide more certainty for project funding over the next two years, but, in
our view, will not result in any material increase in aggregates demand. We
expect only modest growth in aggregates demand from the commercial and
residential construction markets, which are less aggregates intensive than
road and infrastructure repair and construction.
Under our baseline scenario, we expect mid-single digit sales growth in 2012
and 5% sales growth in 2013. We expect EBITDA to improve to $400 million by
2013, compared with its current $$380 million to $390 million. Key assumptions
to our baseline scenario include:
-- Flat federal highway appropriations and only modest growth in other
-- Volume growth of 2% to 3% and similar growth in pricing in 2012;
-- Low single digit price and volume increases in 2013; and
-- Stable operating margins.
Risks to our forecast included an unexpected decline in aggregates demand
potentially caused by a recessionary pressures and a pull back in general
construction activity in the U.S. Upside risks to our forecast could occur due
to the high operating leverage in Martin Marietta's business. For example, we
estimate that EBITDA could increase significantly to more than $500 million if
volumes increased to the 175 million to 180 million ton range. This level
would still be well below Martin Marietta's peak tonnage of about 205 million
tons in 2006. However, given the current state of construction markets and
Federal and State highway spending levels, we do not foresee this type of
growth until 2015 or beyond.
Based on our EBITDA assumptions, we expect Martin Marietta will post funds
from operations (FFO) of about $250 million, resulting in FFO to debt of about
20%. In addition, we expect the company to maintain leverage (after adding
back expenses associated with the failed Vulcan bid) at about 3.6x by the end
of 2012. We consider these metrics to be more in-line with the 'BBB' rating
given our view of its strong business risk profile. Assuming no debt funded
acquisition or share repurchase activity, combined with modest debt reduction,
we would expect leverage to decline to the 3.0x to 3.25x and FFO to debt to
increase to about 25% by the end of 2013.
Our short-term rating on Martin Marietta is 'A-2', and we view the company's
liquidity to be adequate. Our liquidity assessment is based on the following
factors and assumptions:
-- We expect the company's liquidity sources (including cash, funds from
operations, and availability under credit facilities) over the next 24 months
to exceed its uses by more than 1.2x.
-- In our analysis, we assumed liquidity of about $650 million over the
next 12 months, consisting of cash, FFO and availability under its credit
facilities. We estimate total uses in 2012 of approximately $300 million,
including about $150 million in capital expenditures and $75 million in
-- Near-term debt maturities are minimal until the company's revolving
credit and term loan facility matures in 2015.
-- Even if EBITDA declines by 15%, we believe sources would exceed uses
Martin Marietta's credit agreement includes a total leverage covenant of 3.95x
trailing-12-month EBITDA, with the ratio stepping down to 3.75 on Sept. 30,
2012, and returning to its prior level of 3.5x on Dec. 31, 2012. We expect
Martin to maintain at least 15% EBITDA cushion in this covenant.
For 2012, we expect Martin Marietta will produce cash flow from operations of
about $275 million for 2012, which is more than sufficient to fund capital
expenditures of about $150 million and dividends of about $75 million
annually. We expect similar cash flow, capital expenditures, and dividend
levels for 2013. We do not expect any meaningful share repurchase activity
until markets recover more fully.
The rating outlook is stable. We expect Martin Marietta to maintain credit
measures which support the 'BBB' rating despite low levels of aggregates
demand given Martin's healthy operating margins and good cash flow. We believe
financial results for year end 2012, adjusted for the non-recurring expenses
of the attempted Vulcan acquisition, will result in adjusted leverage of about
3.6x and FFO to debt of about 20%.
For 2013, we expect Martin Marietta will dedicate free cash flow to reduce
debt balances. As a result, even in a scenario of flat volumes, total leverage
would improve to between 3.0x and 3.25x.
Our rating does not incorporate a renewed bid for Vulcan Materials once Martin
is permitted to do so. However, should Martin undertake a renewed effort to
acquire Vulcan (or another similarly sized acquisition), it is likely we would
place the ratings under review for further downgrades.
We could also take a negative rating action if earnings deteriorate materially
from current levels, causing credit measures to worsen with adjusted leverage
exceeding 4x on a sustained basis. This could occur if volumes unexpectedly
fell below the 110 million ton level and fuel prices increased substantially
from current levels, causing adjusted EBITDA to fall to below $325 million.
Given our view of Martin's willingness to assume more financial risk, and that
aggregate volumes are not likely to increase substantially over the next two
years, we would view a positive rating action as unlikely in the near term.
Also, for an upgrade to occur, our assessment of Martin's financial risk
profile would need to be consistent with a higher investment grade rating,
requiring prudent levels of leverage with regard to any substantial
acquisition or future share repurchase activity.
However, assuming a more conservative financial risk profile, we could
consider an upgrade if Martin's sales recovered more quickly than expected
resulting in increased size and operating income enabling Martin Marietta to
reduce total leverage to under 2.5x on a sustained basis. For this to occur,
we think Martin's aggregates volumes would have to exceed 175 million tons on
an annual basis, which, along with low single-digit pricing growth, would
result in EBITDA in excess of $550 million.
Related Criteria And Research
-- Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
-- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded,
May 27, 2009
-- Key Credit Factors: Business And Financial Risks In The Global
Building Products And Materials Industry, Nov. 19, 2008
-- Corporate Ratings Criteria 2008, published April 15, 2008.
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Downgraded; Off CreditWatch; Outlook Stable
Martin Marietta Materials Inc.
Corporate Credit Rating BBB/Stable/A-2 BBB+/Watch Neg/A-2
Senior Unsecured BBB BBB+/Watch Neg
Rating Affirmed; Off CreditWatch
Martin Marietta Materials Inc.
Commercial Paper A-2 A-2/Watch Neg
Complete ratings information is available to subscribers of RatingsDirect on
the Global Credit Portal at www.globalcreditportal.com. All ratings affected
by this rating action can be found on Standard & Poor's public Web site at
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