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Rating Action: Moody's changes outlook for PGT to positive from stable; affirms B1 CFR and B2 senior unsecured rating
Global Credit Research - 11 Jan 2021
Approximately $425 million of debt securities affected
New York, January 11, 2021 -- Moody's Investors Service (Moody's) changed the outlook for PGT Innovations, Inc. (PGT) to positive from stable. Moody's also affirmed the company's B1 Corporate Family Rating, B1-PD Probability of Default Rating, and the B2 rating on the company's 6.75% senior unsecured notes due 2026 (inclusive of the proposed $60 million add-on). The Speculative Grade Liquidity Rating was upgraded to SGL-1 from SGL-2.
The positive outlook reflects PGT's solid performance and growth in scale, with pro forma revenue approaching $1.0 billion. Moody's expects that the company will continue to diversify its geographic footprint and product offering, maintain its conservative financial policies, including operating with modest leverage and deleveraging post acquisitions, and generate solid free cash flow. Strong demand expected in the residential end market during 2021 will also support PGT's operating performance.
The $60 million add-on to PGT's existing senior notes, along with cash on hand, will be used to fund the contemplated acquisition of Eco Window Systems. Eco Window Systems is an impact-resistant door and window systems manufacturer based in Florida. PGT is planning to acquire a 75% interest in this company. Pro forma credit metrics for this transaction as of October 3, 2020 are estimated to be approximately 3.5x debt to EBITDA and 3.5x EBITA to interest coverage. Moody's expects PGT's leverage to trend toward 3.0x over the next 12 months.
The upgrade of the Speculative Grade Liquidity Rating to SGL-1 reflects Moody's expectation that PGT will maintain very good liquidity over the next 12 to 15 months, supported by its solid free cash flow, expected at about $55 million per year, the majority of its revolving credit facility remaining undrawn, and no requirement to test the springing financial covenant of first lien net leverage until term loan is repaid.
The following rating actions were taken:
..Issuer: PGT Innovations, Inc.
Corporate Family Rating, affirmed at B1
Probability of Default Rating, affirmed at B1-PD
6.75% senior unsecured notes due 2026 (including the proposed add-on), affirmed at B2 (LGD4)
Speculative Grade Liquidity Rating, upgraded to SGL-1 from SGL-2
Outlook, changed to positive from stable
PGT's B1 Corporate Family Rating is supported by the company's: 1) strong market position in the niche product category of impact-resistant windows and doors; 2) growing scale and goal to diversify its geographic footprint through new store openings and acquisition activity; 3) conservative financial strategies and maintenance of modest debt leverage; 4) strong operating margin, solid interest coverage, and positive free cash flow; and 5) growing customer awareness of the benefits of the impact-resistant product in hurricane-prone regions.
At the same time the rating is constrained by: 1) the company's geographic concentration, with about 80% of sales generated in Florida, and product line concentration, with approximately 73% of revenue coming from impact-resistant windows and doors in the LTM period ended October 3, 2020 and pro forma for the contemplated acquisition; 2) risks related to an acquisitive growth strategy, which include leverage increases, integration challenges and acquired businesses performing below expectations; 3) the cyclicality of residential end markets, including new construction and repair and remodeling; and 4) vulnerability of operations to inclement weather conditions.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The ratings could be upgraded if the company increases its revenue scale well above $1 billion and improves geographic diversity, maintains adjusted debt to EBITDA below 3.0x and EBITA to interest above 4.0x, while generating strong free cash flow with FCF to debt metrics in the mid teens, and maintaining strong margins.
The ratings could be downgraded if the company loses significant market share, if end markets demonstrate weakening trends, if adjusted debt to EBITDA is sustained above 4.0x and EBITA to interest is below 3.0x, or if the company experiences a material deterioration in its liquidity profile.
The principal methodology used in these ratings was 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.
PGT Innovations, Inc., headquartered in North Venice, Florida, is a leading manufacturer and supplier of impact-resistant windows and doors in the US. PGT, founded in 1980, was a pioneer in the impact-resistant window & door market. The company produces high-end, premium and mass-custom aluminum and vinyl-framed windows and doors mainly for the residential repair and remodeling and new construction industries, and also for the commercial market. PGT markets its products under the PGT Custom Windows & Doors, CGI and CGI Commercial, WinDoor, Western Window Systems, Eze-Breeze, and NewSouth Window Solutions brands. In the LTM period ended October 3, 2020, PGT generated approximately $836 million in revenue.
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.
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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.
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Natalia Gluschuk 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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