October 15, 2012 / 4:50 PM / 5 years ago

TEXT-S&P affirms Boise Cascade LLC rating

Overview
     -- U.S. wood products company Boise Cascade LLC has proposed issuing $250 
million of eight-year senior unsecured notes.
     -- We assigned our 'B+' issue rating to the proposed unsecured notes and 
we affirmed our 'B+' corporate credit rating on Boise Cascade.
     -- The stable outlook reflects our view that an improving U.S. housing 
market will boost the company's EBITDA such that leverage could drop to 4x in 
2013.

Rating Action
On Oct. 15, 2012, Standard & Poor's ratings services assigned its 'B+' issue 
rating to Idaho-based Boise Cascade LLC's proposed $250 million senior 
unsecured notes due 2020. The '4' recovery rating indicates our expectation 
for average (30% to 50%) recovery in the event of default. At the same time, 
we affirmed our 'B+' corporate credit rating on the company. The outlook is 
stable. 

At the same time, we revised the recovery rating on Boise Cascade's 'B+' 
subordinate notes to '4' from '3', indicating our expectation for average (30% 
to 50%) recovery in the event of a default. 

Proceeds from the notes issue will be used to repay the company's $220 million 
subordinated notes due 2014 and for general corporate purposes.

Rationale
The ratings on Boise Cascade reflect Standard & Poor's view of the wood 
products company's "weak" business risk profile and its "aggressive" financial 
risk profile. Weaknesses include exposure to highly volatile new home 
construction and negligible EBITDA and funds from operations (FFO) as the 
housing sector bounced along the bottom of an historic downturn in recent 
years. Still, Boise Cascade has emerged from the downturn with a "strong" 
liquidity position and we expect credit ratios to strengthen as residential 
construction improves over the next several years, as contemplated under our 
baseline economic forecast.

Boise Cascade should generate about $100 million of EBITDA and roughly $75 
million of FFO under our baseline forecast. These represent significant 
improvements from our 2012 full-year estimates of at least $50 million of 
EBITDA and about $35 million of FFO. Our baseline forecast reflects the 
following assumptions:

     -- U.S. housing starts jump nearly 25% to 940,000 in 2013 from an 
estimated 760,000 in 2012.
     -- Growth in residential improvement spending is weak at less than 2% 
next year.
     -- Boise Cascade revenues grow 18% in 2013 and gross margins improve to 
12.5% on operating efficiencies and favorable prices for certain products such 
as plywood.
     -- Debt totals about $435 million including the proposed unsecured notes 
and adjustments for operating leases and pension obligations.

Given these assumptions, we expect debt-to-EBITDA to drop to about 4x in 2013 
from an estimated 8x in 2012 and from 16x in 2011. We also expect FFO to debt 
to be between 15% and 20%. These projected ratios are consistent with our 
assessment of Boise Cascade's aggressive financial risk profile.

Boise Cascade is a privately held limited liability company sponsored by 
Madison Dearborn Partners LLC, a Chicago-based private equity firm. Boise 
Cascade operates two primary segments: its building materials segment 
distributes engineered wood products (EWP), plywood, lumber, roofing materials 
and other construction supplies and its wood products segment manufactures 
EWP, plywood, and lumber. 2011 revenue from these two segments was down 
roughly 40% from the cyclical peak in 2005, supporting our view that 
wood-based building products industry is fragmented, oversupplied, and highly 
cyclical.

Liquidity
In our opinion, Boise Cascade maintains a strong liquidity position based on 
the following observations and estimates:

     -- We expect sources of liquidity, including a recently expanded $300 
million asset based revolving credit facility, to exceed uses by more than 
1.5x over the next 12 months and by at least 1.0x over the following 12 months.
     -- We expect sources of liquidity to exceed estimated uses even if EBITDA 
declined by 30% from our approximately $100 million 2013 projection.
     -- We do not expect Boise Cascade to be subject to restrictive financial 
covenants because we do not expect revolver availability to drop below minimum 
thresholds that would trigger a springing interest coverage covenant.

We expect Boise Cascade to generate about $75 million of FFO in 2013, but post 
a modest free operating cash flow deficit--after working capital uses and an 
estimated $30 million of capital expenditures. The company will not face any 
debt maturities until the proposed $250 million senior unsecured notes come 
due in 2020. Further, we do not expect the company to pay dividends to its 
sponsors in 2012 but we do anticipate the potential for the company to 
repurchase up to $100 million of its privately held shares next year.

Sources of liquidity primarily include $174 million of cash on June 30, 2012, 
and an estimated $230 million of availability on a $300 million asset-based 
revolving credit facility that matures in July 2016 (or 2014 if the proposed 
notes are not issued and the $220 million subordinated notes are not repaid 
before the July 2014 maturity). Our availability estimate is adjusted for a 
$37.5 million minimum availability threshold and for assumptions regarding the 
company's borrowing base.

Recovery analysis
For the complete recovery analysis, see Standard & Poor's recovery report on 
Boise Cascade published shortly after this report on RatingsDirect.

Outlook
The stable outlook reflects our baseline view that the U.S. housing market 
recovery is finally gaining momentum after several previous false starts. We 
expect housing starts to improve by about 25% in 2013 and for Boise Cascade's 
2013 EBITDA to improve to about $100 million. Under this scenario, we expect 
leverage to drop to about 4x. We also expect FFO to debt to be 15% to 20%. 
These ratios are consistent with our aggressive financial risk assessment.

A downgrade is unlikely in the next 12 months, even if the housing recovery 
stalls temporarily, given the company's strong liquidity position. However, if 
we would lower our rating if liquidity deteriorated meaningfully and leverage 
increased and stayed over 5x. This could occur, for example, if Madison 
Dearborn opted to sell its shares to a more aggressive financial sponsor. An 
upgrade is also unlikely given the indeterminate medium-to-long term financial 
policies relating to the company's private equity owners.

Related Criteria And Research
     -- Industry Report Card: U.S. Natural Resources Split As Housing Boosts 
Building Products Companies While A Tough Market Puts Coal Miners Deeper In 
The Hole, Oct. 8, 2012. 
     -- Methodology And Assumptions: Liquidity Descriptors For Global 
Corporate Issuers, Sept. 28, 2011.
     -- Key Credit Factors: Business And Financial Risks In The Global 
Building Products And Materials Industry, Nov. 19, 2008.
     -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, 
April 4, 2006
Ratings List
Ratings Affirmed

Boise Cascade LLC
 Corporate Credit Rating                    B+/Stable/--       

Ratings Affirmed; Recovery Rating Revised
                                            To                 From
Boise Cascade LLC
Boise Cascade Finance Corp.
 Subordinated                               B+                 
  Recovery Rating                           4                  3

New Ratings

Boise Cascade LLC
Boise Cascade Finance Corp.
 Senior Unsecured
  US$250 mil notes due 2020                 B+       
   Recovery Rating                          4

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