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Rating Action: Moody's upgrades Beacon Roofing Supply's CFR to Ba3, assigns Ba3 to proposed secured term loan and B2 to proposed unsecured notes; outlook stableGlobal Credit Research - 19 Apr 2021New York, April 19, 2021 -- Moody's Investors Service (Moody's) upgraded Beacon Roofing Supply, Inc.'s (Beacon) Corporate Family Rating (CFR) to Ba3 from B1 and Probability of Default Rating to Ba3-PD from B1-PD. Moody's also affirmed the Ba3 rating on the company's senior secured notes and assigned a Ba3 rating to the company's proposed senior secured term loan. In addition Moody's assigned a B2 rating to Beacon's proposed senior unsecured notes. Moody's expects the terms and conditions of the proposed senior unsecured notes to be similar to Beacon's existing senior unsecured notes due 2025. The outlook is changed to stable from positive. Beacon's speculative grade liquidity rating remains SGL-1.Proceeds from the new term loan and notes issuance, in addition to about $300 million in combined cash on hand and drawings under the company's revolving credit facility, will be used to pay off Beacon's existing senior secured term loan maturing 2025 and to redeem the company's $1.3 billion senior unsecured notes due 2025. The Ba3 on the existing term loan was affirmed and will be withdrawn once this term loan is repaid., The rating on the existing unsecured notes was upgraded to B2 from B3 but will be withdrawn upon redemption. The proposed transaction removes the wall of maturing debt coming due in 2025.The upgrade of Beacon's CFR to Ba3 from B1 reflects confirmation that Beacon will use all the net proceeds of about $750 million from the sale of its interior business to reduce debt. Beacon completed the sale of its interior products and insulation businesses (approximately $1.2 billion in revenue) to Foundation Building Materials, Inc. (B2 stable) on February 10, 2021. Further supporting the ratings upgrade is extension of Beacon's $1.3 billion asset based revolving credit facility by three years to 2026, the same year in which the company's $300 million senior secured notes come due. Beacon now has an improved maturity profile with no maturities until 2026.The change in outlook to stable from positive reflects Moody's expectation that Beacon will uphold conservative financial policies including reinvesting in the business with additional capital expenditures, eschewing transformative acquisitions while using some free cash flow for share repurchase if the company were to initiate such a program. Very good liquidity, positive end market dynamics and inelastic demand for roofing products further support the outlook change to stable.The following ratings are affected by today's action:Upgrades:..Issuer: Beacon Roofing Supply, Inc..... Corporate Family Rating, Upgraded to Ba3 from B1.... Probability of Default Rating, Upgraded to Ba3-PD from B1-PD....Gtd. Senior Global Notes, Upgraded to B2 (LGD5) from B3 (LGD5)Affirmations:..Issuer: Beacon Roofing Supply, Inc.....Senior Secured Term Loan B, Affirmed Ba3 (LGD4) from (LGD3)....Senior Secured Global Notes, Affirmed Ba3 (LGD4) from (LGD3)Assignments:..Issuer: Beacon Roofing Supply, Inc.....Senior Secured Term Loan B, Assigned Ba3 (LGD4)....Senior Unsecured Global Notes, Assigned B2 (LGD5)Outlook Actions:..Issuer: Beacon Roofing Supply, Inc.....Outlook, Changed To Stable From PositiveRATINGS RATIONALEBeacon's Ba3 CFR reflects Moody's expectation that the company will benefit from ongoing demand for residential roofing repair, the main driver of Beacon's revenue. Moody's forecasts good operating performance with adjusted EBITDA margin sustained in the range of 9.0% - 9.5%. Moody's also projects declining leverage, with adjusted debt-to-LTM EBITDA of 3.6x at year-end 2023 versus 4.9x at Q1 2021 (quarter ended December 31, 2020) and adjusted free cash flow-to-debt approaching 15.4% by late-2023. However, Beacon faces strong competition. Also, Clayton, Dubilier & Rice LLC (CD&R), through its equity ownership and board representation, and in conjunction with other board members, will influence business decisions including long-term deployment of capital and deployment of cash. These factors pose the main credit risks to Beacon.Beacon's SGL-1 Speculative Grade Liquidity Rating reflects Moody's view that the company will maintain very good liquidity over the next two years generating free cash flow throughout each year. We project Beacon will generate consistent free cash flow in excess of $300 million in each of the next two fiscal years ending September 30. Cash on hand (pro forma of about $360 million at December 31, 2020) is more than sufficient to meet working capital needs due to seasonal demands or to reduce debt. The revolver is ample to meet any operational needs as well.The Ba3 ratings on Beacon's proposed senior secured term loan and existing senior secured notes, the same rating as the Corporate Family Rating, result from their subordination to company's revolving credit facility but priority of payment relative to the company's senior unsecured notes. The term loan and secured notes are pari passu. They have a first lien on substantially all noncurrent assets and a second lien on assets securing the company's revolving credit facility (ABL priority collateral).The B2 rating on the company's proposed senior unsecured notes, two notches below the Corporate Family Rating, results from their subordination to Beacon's considerable amount of secured debt.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade:» Debt-to-LTM EBITDA is sustained near 3.5x» EBITDA margin sustained near 10%» Preservation of very good liquidity» Maintenance of conservative financial policies» CD&R reduces its ownership and influence in BeaconFactors that could lead to a downgrade:» Debt-to-LTM EBITDA is sustained above 4.5x» Significant contraction in EBTDA margin» The company's liquidity profile deteriorates» Excessive usage of the revolving credit facility» Aggressive acquisition or shareholder return activityThe principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.Beacon Roofing Supply, Inc., headquartered in Herndon, Virginia, is one of the largest wholesale distributors of roofing material and other building products in the US. CD&R, through its affiliates, controls about 30% of the company's total voting rights.REGULATORY DISCLOSURESFor 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_1243406.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.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK 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. Peter Doyle Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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