-- U.S. chlor-alkali, vinyls, and building products maker Georgia Gulf
Corp. (Georgia Gulf) is merging with PPG Industries Inc.'s commodity chemicals
-- We are raising our corporate credit rating on Georgia Gulf to 'BB'
-- We are raising the rating on Georgia Gulf's existing debt and
assigning ratings to the new debt that will partially finance the transaction.
-- The stable outlook reflects our expectation that the companies will
successfully integrate their operations and generate credit metrics consistent
with the ratings.
On Jan. 15, 2013, Standard & Poor's Ratings Services removed its corporate
credit rating on Georgia Gulf from CreditWatch, where we had placed it on July
19, 2012, when the parties announced the merger. We then raised the rating to
'BB' from 'BB-'.
At the same time, we removed our rating on Georgia Gulf's existing senior
secured notes from CreditWatch, raised the issue rating to 'BBB-' (two notches
above the corporate credit rating) from 'BB', and revised the recovery rating
to '1' from '2'. The '1' recovery rating indicates our expectation of very
high (90% to 100%) recovery in the event of a payment default.
In addition, we assigned a 'BBB-' issue rating, with a recovery rating of '1',
to Eagle Spinco Inc.'s (Eagle Spinco) proposed $212 million senior secured
term loan due 2017. Following the merger, Eagle Spinco Inc. will be wholly
owned by Georgia Gulf, which will change its name to Axiall Corp.
We also assigned a 'BB' issue rating, with a recovery rating of '4', to Eagle
Spinco's proposed offering of $688 million of senior unsecured notes due 2021.
The '4' recovery rating indicates prospects for average (30% to 50%) recovery
in the event of a payment default.
The outlook is stable.
The one-notch upgrade of Georgia Gulf reflects our more favorable assessment
of the company's business risk profile as "fair" following the merger,
together with what we consider to be the continuation of its "significant"
financial risk profile.
Georgia Gulf will merge with PPG Industries Inc.'s commodity chemicals
business via a stock-for-stock exchange, using a Reverse Morris Trust
structure. (A Reverse Morris Trust is a transaction that combines a divisive
reorganization (a spin-off or split-off) with an acquisitive reorganization
(statutory merger) to allow a tax-free transfer of a subsidiary under U.S.
law.) At Georgia Gulf's current stock price, the transaction is valued at
about $2.6 billion. It will be financed with 35.2 million shares (or about
$1.6 billion) of new common stock, $900 million of new debt, and $95 million
of assumed debt. In addition, Georgia Gulf is assuming certain pension, other
postemployment benefit, and environmental liabilities. A favorable tax ruling
has been received, Georgia Gulf shareholders have approved the merger, and the
parties expect the transaction to close by the end of this month.
Following the merger, Georgia Gulf's existing shareholders will own 49.5% of
the company, and PPG's shareholders will own 50.5%. Pro forma combined
last-12-month sales as of Sept. 30, 2012, totaled about $4.9 billion, with
EBITDA of about $670 million (before synergies that management expects to
total $115 million).
The transaction will strengthen Georgia Gulf's business risk profile to "fair"
from "weak," as it will increase the company's backward integration into
chlorine production and add significant merchant chlorine and caustic soda
capacity. The combined entity will be among the largest North American
commodity chemical producers, and we believe its greater size and scope will
increase its purchasing power and improve its operating rates. In addition,
the high degree of backward integration into electricity co-generation from
natural gas will improve its competitive position by leveraging its access to
comparatively low-cost U.S. natural gas. We believe that the two parties'
historical supplier/customer and joint-venture partner relationships and the
close proximity of their respective Lake Charles, La., operations increase
Georgia Gulf's familiarity with PPG's operations and reduce integration risk.
Pro forma total adjusted debt will be about $1.8 billion, and total adjusted
debt to EBITDA will be about 2.6x, before any synergy benefits. Our analysis
adjusts debt to include about $300 million of estimated tax-effected pension,
postretirement, and environmental liabilities and capitalized operating leases
at the combined entity.
While we expect the combined company's business to remain cyclical, we regard
industry supply and demand dynamics as generally favorable. Moreover, this
transaction increases industry consolidation. Although a weak global economy
and capacity additions could cause demand to soften somewhat during the next
year or two, the combined company should benefit considerably over the long
term from a gradual recovery in the U.S. housing markets.
Georgia Gulf's competitive position will improve as a result of this merger.
However, we expect the cyclical, commodity nature of the combined operations,
limited product diversity, and heavy reliance on key operating sites
(particularly in Lake Charles) to continue to constrain its business risk
profile. In addition, we believe that increasing chemical industry
regulation--particularly, in connection with the transport of chlorine--is
likely to result in somewhat higher operating costs in the future.
Following the transaction, Georgia Gulf should see a substantial increase in
its EBITDA margins and return on capital, along with reduced volatility in its
operating earnings. We expect EBITDA margins will be at or above 13% (subject
to some variation) and its pretax return on capital about 13%.
Our base case scenario assumes a continued U.S. economic recovery and a
gradual increase in U.S. residential construction during the next few years.
On a global basis, we expect subdued economic growth in 2013. However, Georgia
Gulf's operating profitability could exceed our expectations if the U.S.
housing market recovery is stronger than we currently anticipate. Despite some
capacity additions, we expect chlor-alkali and vinyl resin supply and demand
trends to remain relatively favorable, and we anticipate that North American
vinyl resin producers will continue exporting a substantial percentage of
production because of a continued favorable cost position. However, we note
that longer term, these conditions could cause North American vinyl resin
capacity to increase.
We consider the company's goal of 2x reported debt to midcycle EBITDA and 3x
trough EBITDA interest coverage consistent with our expectations at the
current ratings. Our assessment of Georgia Gulf's financial policy as
"aggressive" reflects the growth and investment objectives of its management
team, including the potential for additional large capital investments. We
expect Georgia Gulf to generate funds from operations to total adjusted debt
of about 25%, appropriate for the ratings. Under our base-case assumptions,
EBITDA interest coverage is about 7x.
We expect liquidity to be adequate as defined in our criteria.
Immediately following the merger, we expect Georgia Gulf to have about $140
million of cash. In addition, the company plans to enter into a new, unrated
$500 million five-year asset-based lending (ABL) revolving credit facility,
which we expect to be fully available at closing except for modest letter of
credit usage. The ABL facility contains a minimum fixed-charge coverage ratio
of 1.1x if excess availability falls below 12.5% of the facility size for
three consecutive business days, which we do not expect to occur. We expect
the term loan to contain a maximum 3.5x senior secured leverage covenant,
under which the company should have ample cushion.
Liquidity should be sufficient for the company to comfortably meet ongoing
operating and capital requirements, including seasonal and other fluctuations
in working capital and capital spending of about $175 million per year as well
as outlays that management expects to total about $55 million to achieve
merger-related synergies. We expect dividends to be modest--about $22 million
per year if the company maintains its current quarterly dividend of $0.08 per
share. Beginning in 2014, we expect the company to generate discretionary cash
flow of more than $250 million per year.
Relevant aspects of our assessment of the company's liquidity profile include
our expectations as follows:
-- Sources of liquidity will exceed uses by 1.2x or more during the next
-- Net sources would be positive even with a 15% drop in EBITDA;
-- The company's sound relationships with banks and a generally
satisfactory standing in credit markets; and
-- The company should be able to absorb low-probability shocks because of
The senior secured debt rating is 'BBB-' (two notches above the corporate
credit rating) with a recovery rating of '1', indicating our expectation of
very high (90% to 100%) recovery in the event of a payment default. The senior
unsecured debt rating is 'BB' (the same as the corporate credit rating) with a
recovery rating of '4', denoting prospects for average (30% to 50%) recovery.
For the complete recovery analysis, see our recovery report on Georgia Gulf to
be published shortly on RatingsDirect on the Global Credit Portal.
The outlook is stable. Despite industry cyclicality, we expect the company to
achieve funds from operations to total adjusted debt of 25% or more.
Post-merger, it should benefit from increased scale and, to an even greater
degree than at present, low natural gas costs. In addition, during the next
few years, we believe the company stands to benefit from an expected recovery
in U.S. housing markets. There is some capacity at the current rating level
for a moderate-size investment to increase vertical integration into ethylene
production. Nevertheless, we could lower the ratings if economic conditions or
other factors cause operating results to be weaker than we expect such that
FFO to debt drops below 20% without prospects for near-term improvement. We
believe this could occur if revenues remain flat at pro forma combined levels,
debt is unchanged, and EBITDA drops about two percentage points to about 11%.
Longer term, we could raise the ratings slightly if the company reduces debt
and consistently generates FFO to debt above 30%.
Upgraded/Recovery Rating Revised; CreditWatch/Outlook Action
Georgia Gulf Corp.
Corporate Credit Rating BB/Stable/-- BB-/Watch Pos/--
Georgia Gulf Corp.
Senior Secured BBB- BB/Watch Pos
Recovery Rating 1 2
Eagle Spinco Inc.
$212 mil. term loan due 2017
Senior Secured BBB-
Recovery Rating 1
$688 mil. notes due 2021
Senior Unsecured BB
Recovery Rating 4