Associated Materials, LLC -- Moody's assigns B3 rating to Associated Materials' senior secured notes, B3 CFR; outlook stable
Rating Action: Moody's assigns B3 rating to Associated Materials' senior secured notes, B3 CFR; outlook stable
Global Credit Research - 12 Aug 2020
New York, August 12, 2020 -- Moody's Investors Service (Moody's) assigned a B3 rating to the prospective $250 million senior secured notes issuance of Associated Materials, LLC ("Associated Materials"). In addition, Moody's assigned a B3 corporate family rating and B3-PD probability of default rating to Associated Materials. The outlook is stable.
The notes issuance is part of a larger recapitalization of Associated Materials, whereby most of the holders of the company's existing $675 million 9% senior secured notes will receive $25 million in cash plus equity in the company in exchange for their notes. The proceeds from the new $250 million notes offering will be used to fund the cash portion of the exchange, pay down the existing balance on the company's ABL revolving facility, fund closing costs as well as for general corporate purposes. As of June 30, 2020 the company had $152 million drawn on the revolver. Following the completion of the restructuring transactions, the company expects to downsize its ABL facility commitment to $150 million and extend the maturity to 2024.
Assignments:
Issuer: Associated Materials, LLC
Corporate Family Rating at B3
Probability of Default Rating at B3-PD
Senior Secured Notes due 2025 at B3 (LGD4)
Outlook Actions:
Issuer: Associated Materials, LLC
Outlook assigned Stable
RATINGS RATIONALE
Associated Materials' B3 corporate family and senior secured ratings reflect Moody's expectation that the company will experience margin contraction coupled with a decline in revenue in 2020, followed by a gradual recovery in 2021. Moody's forecast considers lower home construction activity and a reduced need for discretionary items such as vinyl windows and siding, Associated Materials' primary products, amid the COVID-19 pandemic. The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.
Moody's ratings also reflect the significant competitive landscape Associated Materials operates in, which limits the company's pricing power.
However, the ratings are supported by the company's broad manufacturing and distribution footprint across the US and Canada, diverse customer base and extensive offering of exterior home products. Furthermore, the ratings incorporate the strong fundamentals that support the repair and remodel category, which makes up roughly 70% of Associated Materials' sales, including low mortgage interest rates and limited housing supply relative to demand. Proforma for the secured notes issuance, Associated Materials will have leverage, as defined by debt/EBITDA, of 4.2x.
Moody's expects that the company will maintain a measured approach to its financial policy and not aggressively increase leverage. Following the recapitalization transactions, the new shareholders of the company will also be creditors participating in the new secured notes offering and have significant board representation. This dynamic should help to mitigate the inherent conflict of balancing the needs of debt and equity holders.
Moody's regards Associated Materials' liquidity as adequate over the next 12 to 18 months. Associated Materials' proforma cash position of $68 million will more than cover the company's expected negative free cash flow while the undrawn and fully available $150 million ABL revolver will provide additional liquidity.
The stable outlook reflects Moody's expectations that the company will see demand improvement in the repair and remodel segment and maintain adequate liquidity.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Moody's indicated that a rating upgrade would likely reflect maintenance of debt/EBITDA below 5.0x, an improvement in EBITA/interest expense closer to 2.5x and improved liquidity, including sustained generation of positive cash flow. A rating downgrade could result from debt/EBITDA increasing above 6.0x, interest coverage sustained below 1.5x or a deterioration in the company's liquidity profile.
The principal methodology used in these ratings was the Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079 . Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Associated Materials, LLC, headquartered in Cuyahoga Falls, Ohio, is a North American manufacturer and distributor of exterior building products. The company's core products are vinyl windows and vinyl siding. Associated Materials is also a distributor of third-party products, mainly roofing materials, insulation and exterior doors. Revenue for the twelve months ended March 28, 2020 was about $1.3 billion. Associated Materials is privately owned and does not disclose its financial information publicly.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Griselda Bisono Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Dean Diaz Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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