Fitch Ratings has assigned a Long-term Issuer Default Rating (IDR) to
Fitch has also assigned a 'B+(EXP)'/'RR3' rating to the proposed senior secured term loan and a 'CCC+(EXP)'/'RR6'rating to the proposed senior unsecured notes. The Rating Outlook is Stable.
The expected ratings are predicated on the completion of the acquisition of the company by
LBM's expected IDR reflects the high expected leverage levels after the close of the transaction, the company's relatively weaker competitive position as a distributor in the building products supply chain, the high cyclicality of its end-markets and its weak profitability metrics. Fitch's expectation for residential housing growth and a stabilizing commodity environment into 2021 supports modest deleveraging in the intermediate-term through EBITDA growth. The company's large scale, breadth of product offerings, extended debt maturity schedule and adequate liquidity positions are also factored into the expected ratings.
KEY RATING DRIVERS
High Leverage Levels: Fitch expects pro forma (including acquisitions completed from January to
Weak Overall Competitive Position: The company's competitive position is weak relative to more highly-rated building products manufacturers in Fitch's coverage due to its position as a distributor in the supply chain, LBM's relatively low brand equity, and the company's limited value-added product offerings. Fitch believes the company has little competitive advantage relative to competitors of similar or greater scale. Breadth of product offerings and national scale provides some competitive advantages relative to distributors with only local presences and niche product offerings.
The company estimates its market share within the markets it serves is around 8%-10%, which is strong for the industry, but modest on an absolute basis. Fitch estimates that
Low EBITDA and FCF Margins: LBM's profitability metrics are commensurate with a 'B'-category building products issuer and are roughly in line with large distributor peers. Fitch-adjusted EBITDA margins have historically been in the 6%-7% range while FCF margins have sustained in the low-single digits. Fitch expects EBITDA margins to situate in the 7.0%-7.5% range during the forecast period, driven by stronger operating leverage and some fixed-cost takeout in 2020. The company's highly variable cost structure and ability to wind down working capital should help preserve positive FCF and liquidity through a modest construction downturn, but material declines in EBITDA margins could lead to unsustainable long-term leverage levels.
Financial Flexibility: LBM will have good financial flexibility following the close of the acquisition by
Broad Product Offering: LBM offers a comprehensive suite of products for homebuilders and other construction professionals, including structural, interior and exterior products as well as some installation services and light manufacturing capacity, enabling the company to be a one-stop shop for residential and commercial construction needs. This product breadth enhances customer relationships, provides some competitive advantage over smaller distributors and diversifies the company's supplier base.
Aggressive Capital Allocation Strategy: Fitch expects ownership under
Highly Cyclical End-Markets: The majority of LBM's sales are directed to highly cyclical end-markets. Management estimates that about 51% of sales are to new single-family home construction, 15% to multi-family construction, 11% to commercial construction and 5% to other end markets. The remaining 18% of sales are exposed to the residential repair and remodel end-market, which Fitch views as less cyclical than new construction activity. The company's substantial exposure to new construction weighs negatively on the credit profile when compared to other building products suppliers with more stable end-market exposure. Credit metrics and profitability may be more volatile than peers with higher repair and replacement demand exposure through the construction cycle.
DERIVATION SUMMARY
LBM has weaker credit and profitability metrics than Fitch's publicly-rated universe of building products manufacturers, which are concentrated in low-investment grade rating categories. These peers typically have total debt-to-operating EBITDA of less than or equal to 3x, global operating profiles and stronger market share than LBM. The company is smaller in scale but has similar end-market exposure, profitability metrics and product offerings to its closest publicly-traded peer,
KEY ASSUMPTIONS
Fitch expects pro forma total debt-to-operating EBITDA to be about 6.6x after the close of the transaction with
Mid-single digit organic revenue growth in 2020 and 2021 supported by residential housing strength, partially offset by weakness in commercial construction activity;
Fitch-adjusted EBITDA margins sustain in the 7.0%-7.5% range;
FCF generation of roughly
The company deploys about
Additional FCF applied towards debt reduction. Proceeds may be applied towards shareholder distributions as leverage declines;
Total pro forma debt-to-operating EBITDA of 5.8x at YE2021 and 5.4x at YE2022 and EBITDA/interest paid above 3.0x during those years.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to a positive rating action/upgrade:
Fitch's expectation that total debt-to-operating EBITDA will be sustained below 4.5x;
The company lowers its end-market exposure to the new home construction market to less than 50% of sales in order to reduce earnings cyclicality and credit metric volatility through the housing cycle;
The company maintains a strong liquidity position with no material short-term debt obligations.
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
Fitch's expectation that total debt-to-operating EBITDA will be sustained above 6.0x;
Operating EBITDA/Interest paid falls below 2.0x;
Fitch's expectation that FCF generation will approach neutral or fall to negative.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch expects the company to have an adequate liquidity position at the close of the pending purchase transaction with
Maturity Schedule: Fitch expects the company to have no meaningful debt maturities post-transaction close until 2025, when the company's ABL revolver comes due. The term loan and senior unsecured notes have expected maturities of seven and eight years, respectively. The term loan will amortize at 1% annually and will be subject to an excess cash flow sweep.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or to the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg.
DATE OF RELEVANT COMMITTEE
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
RATING ACTIONS
ENTITY/DEBT RATING RECOVERY
LBM Acquisition, LLC LT IDR B(EXP) Expected Rating
senior unsecured
LT CCC+(EXP) Expected Rating RR6
senior secured
LT B+(EXP) Expected Rating RR3
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
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