-- U.S. building products manufacturer Gibraltar Industries
is seeking to issue $210 million senior subordinated notes to refinance existing
debt and pay associated fees and expenses.
-- We are affirming our 'BB-' corporate credit rating on Gibraltar. We
are assigning our 'BB-' issue-level rating to the proposed notes. The recovery
rating is '3'.
-- The stable outlook reflects our expectation that Gibraltar's credit
metrics will remain consistent with our view of the rating, which allows for
the company to pursue its acquisition-driven growth strategy while maintaining
leverage below 4x.
On Jan. 16, 2013, Standard & Poor's Ratings Services affirmed its 'BB-'
corporate credit rating on Buffalo, N.Y.-based Gibraltar Industries Inc. The
rating outlook is stable.
We also assigned a 'BB-' issue-level rating to the company's proposed $210
million senior subordinated notes. The recovery rating on the proposed notes
is '3', indicating our expectation for meaningful (50% to 70%) recovery in the
event of payment default under our default scenario.
The ratings on Gibraltar Industries reflect Standard & Poor's view of the
company's "weak" business risk profile and "significant" financial risk
profile. Our business risk profile considers the building products
manufacturer's dependence on cyclical residential, industrial, and
construction end markets; high customer concentration; and exposure to
volatile raw materials costs. These factors are modestly offset by the
company's good position in niche markets and highly variable cost structure.
The financial risk assessment incorporates our view that the company will
maintain leverage below 4x and "strong" liquidity while continuing to pursue
an acquisitive growth strategy. Gibraltar Industries is a leading
manufacturer, processor, and distributor of products for the building,
highway, and bridge construction markets. The company's strategy is to target
high market share opportunities in niche products and be the low-cost provider
in these markets.
Our baseline scenario assumes Gibraltar's EBITDA will approximate $82 million
in 2012, compared with $75 million in 2011. Our anticipated EBITDA growth in
2012 reflects the incremental benefits associated with completed acquisitions.
In 2013, our economists predict a pickup in residential construction markets
which, in addition to moderate expansion in the infrastructure segment, should
result in EBITDA of about $89 million. Key assumptions to our 2013 EBITDA
-- New housing starts are projected to be about 990,000 units in 2013, up
27% from 2012, and may further improve to 1.3 million units in 2014.
-- We expect nonresidential construction end-markets to grow in the low
single digits in 2013 and further improve in 2014.
-- Margin improvement reflects ongoing recovery in residential
construction end markets, cost reductions, and contribution from the
infrastructure business line.
The EBITDA forecast reflects our view that the cyclical diversity afforded by
the comparatively stable and slightly higher margin infrastructure business
segment will lead to Gibraltar's EBITDA margins exceeding 10%. Key risks to
our earnings forecast include a reversal of the expected recovery in housing
and commercial construction activity and significant steel price fluctuations.
We believe raw materials--including steel--represent more than 45% of some
Debt (including adjustments for operating leases and pensions) was about $240
million on Sept. 30, 2012, unchanged from Dec. 31, 2011. The proposed
refinancing is anticipated to result in minimal changes to the company's
prospective debt level. Given the modest EBITDA growth expected over the next
12 to 18 months, we anticipate leverage metrics improving to below 3x over
this period, compared with 3.3x on Sept. 30, 2012. Furthermore, we anticipate
funds from operations (FFO) to debt will approach 30%, compared with 21% on
Sept. 30, 2012. We believe these metrics are consistent with the significant
financial risk profile given our expectation that management will continue to
pursue an acquisitive growth policy. Our ratings incorporate our view that the
company would fund any acquisitions consistent with our view of its
significant financial risk.
We assess Gibraltar's liquidity as strong. Relevant aspects and assumptions in
the company's liquidity profile include:
-- Sources of liquidity will exceed uses by 1.5x or more over the next
couple of years;
-- Liquidity sources will continue to exceed uses, even if forecasted
EBITDA were to decline 30%; and
-- Compliance with financial maintenance covenants would survive a 30%
drop in forecasted EBITDA without the company breaching covenant test measures.
As of Sept. 30, 2012, total liquidity was $211 million, including $71 million
in cash and $140 million of availability on Gibraltar's $200 million
asset-based lending (ABL) facility due 2016, after accounting for $14 million
of letters of credit. We do not expect the proposed transaction to affect the
company's liquidity position. Availability under the ABL facility is subject
to a borrowing base of eligible receivables and inventory, which will
fluctuate throughout the year because of seasonal working capital changes and
a fixed-asset advance. Gibraltar must maintain a fixed-charge coverage ratio
over 1.25x. We believe the company will have a strong EBITDA cushion of at
least 30% for its fixed-charge covenant.
The company has demonstrated a disciplined approach to managing working
capital, reducing its inventory to about 60 days out from highs of about 90
days. Although the building products business' seasonality results in some
fluctuation of working capital, we expect the company to continue managing
outflows in accordance with its financial policies. Based on our operating
assumptions, annual free cash flow should approximate $30 million in 2013 as
capital expenditures increase to about $20 million from recent maintenance
spending of about $17 million. In addition, we expect any potential
acquisitions or shareholder rewards will not negatively impact the company's
financial risk profile. The company has no significant debt maturities in the
next few years and the proposed refinancing would further extend the maturity
profile of the company's debt.
The rating on Gibraltar's proposed $210 million senior subordinated notes is
'BB-', same as the corporate credit rating. The recovery rating on the
proposed notes is '3', indicating our expectation for meaningful (50% to 70%)
recovery in the event of payment default under our default scenario. For the
complete recovery analysis, see Standard & Poor's recovery report on Gibraltar
Industries Inc., to be published shortly on RatingsDirect.
The rating outlook is stable, reflecting our belief that Gibraltar's credit
measures will remain consistent with recent levels and the 'BB-' corporate
credit rating, despite weak residential and nonresidential markets. We believe
leverage will stay below 4x, even after giving consideration to the company's
acquisition-driven growth strategy. Moreover, our outlook incorporates the
company's strong liquidity position, favorable debt maturity profile, good
expected cushion regarding its fixed-charge covenant, and ability to generate
modest free cash flow.
We could lower the rating if credit measures weakened from current levels such
that leverage was likely to be maintained between 4x and 5x. This could occur
if the recovery in residential and nonresidential end markets reverses course
or if the company cannot pass through raw material costs following a decline
in demand. We could downgrade Gibraltar if the company pursued a more
aggressive financial policy regarding its acquisition growth strategy.
Based on our view of the company's weak business risk profile and acquisition
driven growth strategy, an upgrade is viewed as unlikely in the next year.
Related Criteria And Research
Methodology And Assumptions: Liquidity Descriptors For Global Corporate
Issuers, Sept. 28, 2011
Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
Key Credit Factors: Business And Financial Risks In The Global Building
Products And Materials Industry, Nov. 19, 2008
Temporary contact numbers: Gayle M Bowerman, 646-634-8674; Tobias Crabtree,
Gibraltar Industries Inc.
Corporate Credit Rating BB-/Stable/--
Recovery Rating 3
Gibraltar Industries Inc.
US$210 mil nts BB-
Recovery Rating 3