-- U.S.-based building products manufacturer USG Corp.'s strong
liquidity position enabled it to endure a very sharp cyclical downturn and now
positions the company to take advantage of an expected housing recovery, in our
-- We are revising our outlook to stable from negative and affirming all
existing ratings, including our 'B' corporate credit rating.
-- The stable outlook reflects our view that improved demand, recent
price increases, and successful cost cutting measures will improve EBITDA from
its deep cyclical lows to levels sufficient to cover interest expense this
On Aug. 21, 2012, Standard & Poor's Ratings Services revised its outlook on
USG Corp. to stable from negative. At the same time, we affirmed all existing
ratings, including our 'B' corporate credit rating, on the company.
The outlook revision to stable reflects our view that improved demand, recent
price increases, and successful cost cutting measures will lift EBITDA off
deep cyclical lows to levels sufficient to fully cover interest expense this
Our rating on USG reflects our view of the company's financial risk as "highly
leveraged" and its business risk as "weak". Weaknesses include very high
levels of debt and volatile demand for its products, particularly wallboard
which is tied closely to residential construction activity. Still, the company
is positioned to benefit from an expected housing recovery given its strong
liquidity position and good operating leverage in its national manufacturing
platform, in our opinion.
Under our baseline scenario, we expect revenues to improve from $3 billion in
2011 to $3.3 billion in 2012and to more than $3.5 billion in 2013. We expect
EBITDA to surpass $300 million by 2013, but for leverage to remain high at
about 10x. We expect the company to cover its interest expense (by 1.1x in
2012 and by 1.3x in 2013) at these EBITDA levels. We also expect FFO deficits
to shrink in 2012 before turning positive in 2013 (to between $70 million and
$75 million). Our baseline scenario reflects the following assumptions:
-- Recent wallboard price increases hold (up 18% to $131 per thousand
square feet through the first six months of 2012);
-- North American Gypsum segment revenues (about 55% of 2011 revenues)
increase roughly in line with our expectation for residential construction
spending (12% in 2012 and 11% in 2013);
-- Building Products Distribution segment revenues (about 10% of 2011
revenues) also increase in line with residential construction spending;
-- Worldwide Ceilings segment revenues (about 35% of 2011 revenues)
increase in line with our expectation for non-residential construction
spending (10% in 2012 and 1% in 2013); and
-- EBITDA margins improve from less than 8% in 2011 to 9% in 2012 and 11%
in 2013 reflecting ongoing cost controls (USG has taken $450 million of
permanent cost reductions over the past several years) and good operating
leverage (gypsum segment capacity utilization is currently less than 50%).
Chicago-based USG is a manufacturer and distributor of building materials
including wallboard and ceiling tile. The company generated $3 billion of
revenues in 2011, down nearly 50% from the peak of the U.S. housing cycle in
2006. The company is very highly leveraged with $3 billion of debt outstanding
(including operating lease and other adjustments) and just $111 million of
EBITDA in 2011.
We view USG to have a "strong" liquidity profile, which is a key credit factor
and an underpinning of our "B" corporate credit rating. Our liquidity
assessment is based on the following observations and assumptions:
-- We expect sources of liquidity (primarily cash and availability under
an asset-based revolving credit facility) to exceed anticipated uses by over
1.5x over the 12 months and by at least 1.0x over the following 12 months;
-- We expect liquidity sources would cover anticipated uses even if
EBITDA were to decline by 30%; and
-- We believe the company would continue to exceed the availability
threshold under its credit facility even considering a 30% drop in EBITDA.
Primary sources of liquidity include $533 million of cash and marketable
securities on June 30, 2012 and $173 million available under an asset-based
revolving credit facility that matures in 2015. On June 30, 2012, USG also had
about $40 million available under a Canadian revolving credit facility that
also matures in 2015.
The U.S. asset-based revolver is governed by a single covenant that requires
USG to maintain a 1.1x fixed charge coverage ratio or to maintain a minimum of
$46 million of availability. We have adjusted our sources of liquidity to
include this minimum availability requirement because USG does not currently
cover its fixed charges by 1.1x. However, we expect the company to do so by
2013 under our baseline scenario.
Uses of liquidity under our baseline scenario include operating cash flow
deficits of $15 million to $30 million in each of the next two years and
annual capital expenditures of $75 million to $100 million. The company does
not face a meaningful debt maturity until the remaining $59 million balance of
its $300 million senior notes come due in 2014 ($241 million was repurchased
earlier in 2012).
For the complete recovery analysis, see Standard & Poor's recovery report on
USG published on RatingsDirect on April 17, 2012.
The stable outlook reflects our view that EBITDA will improve over the next 12
months to levels sufficient to fully cover the company's interest expense. We
expect EBITDA to more than double in fiscal 2012 (to over $250 million) and
cover interest by 1.1x. That said, this improvement will come off very weak,
cyclical lows, and we expect leverage to remain high at over 10x.
We would upgrade USG if leverage dropped and was sustained below 5x. We view
this scenario as unlikely until annual U.S. housing starts top one million,
which we do not expect to occur until 2014.
We would lower our ratings if the housing recovery stalled and the company did
not take steps (e.g. close additional plants and trim capital expenditures) to
preserve liquidity in excess of $600 million.
Related Criteria And Research
-- Issuer Ranking: U.S. And Canadian Building Materials And Products
Companies, Strongest To Weakest, July 10, 2012
-- Stiffer Headwinds Are On The Horizon For Some U.S. Natural Resources
Companies, Though Most Outlooks Hold Stable For Now, July 13, 2012
-- Recovery Report: USG Corp.'s Recovery Rating Profile, April 17, 2012
-- Methodology And Assumptions: Standard & Poor's Standardizes Liquidity
Descriptors For Global Corporate Issuers, July 2, 2010
-- Key Credit Factors: Business And Financial Risks In The Global
Building Products And Materials Industry, Nov. 19, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Affirmed; Outlook Revised To Stable
Corporate Credit Rating B/Stable/-- B/Negative/--
Senior Unsecured B-
Recovery Rating 5
Senior Unsecured BB-
Recovery Rating 1