August 21, 2012 / 7:15 PM / 5 years ago

TEXT-S&P revises USG Corp outlook to stable

Overview
     -- 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
opinion.
     -- 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 
year.
Rating Action
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.

Rationale
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 
year. 

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.

Liquidity
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). 
Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
USG published on RatingsDirect on April 17, 2012.
Outlook
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 List
Ratings Affirmed; Outlook Revised To Stable
                                  To               From
USG Corp.
 Corporate Credit Rating          B/Stable/--      B/Negative/--
 Senior Unsecured                 B-    
   Recovery Rating                5 
 Senior Unsecured                 BB-   
   Recovery Rating                1

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