Northwest Hardwoods Inc. Issuer Credit Rating Lowered To 'CCC+' On Refinancing Concerns; Outlook Revised To Negative

  • U.S.-based Northwest Hardwoods Inc.'s operating and financial performance continues to deteriorate. As a result, we believe that the company will begin 2019 with leverage exceeding 9x, after third quarter leverage of about 7.6x.
  • As a result of very high leverage and modest cash flow, we believe that Northwest Hardwood's capital structure is unsustainable in the long term, leaving the company vulnerable and dependent upon favorable business, financial, and economic conditions to meet its financial commitments. We believe that the company will rely on its covenant-lite $150 million asset-based lending (ABL) credit facility to fund its interest payments over the next 12 months.
  • We are lowering our issuer credit rating on Northwest Hardwood to 'CCC+' from 'B-'. We are also lowering our issue-level rating on the company's $435 million senior secured notes due August 2021 to 'CCC+' from 'B-'. The recovery rating of '4' remains unchanged.
  • We are revising our ratings outlook to negative from stable to reflect the potential for a debt restructuring given our view that current debt trading levels and elevated leverage metrics could hinder a refinancing of the company's secured notes at or prior to maturity.
NEW YORK (S&P Global Ratings) Feb. 15, 2019—S&P Global Ratings today took the 
rating actions listed above. The downgrade on Northwest Hardwoods Inc. 
primarily reflects what we believe to be increasing refinancing risk, as well 
as subdued expectations for operating results in 2019. Our assumptions for 
2018 EBITDA are less than originally expected, driven by higher log prices 
that squeezed gross margins by 230 basis points (bps) in the third quarter. We 
expect margins will continue to deteriorate without a significant improvement 
in operating performance. The company's history of weak free cash flow, which 
we expect to continue, will not be enough to repay its notes that are due in 
August 2021. The company recently obtained an extension on its ABL and it is 
now due 60 days before the maturity of the notes. As of September 2018, about 
$28 million was outstanding on the credit facility and $75 million was 
available.

The negative outlook reflects the potential for a lower rating if we believe a 
debt restructuring is likely within the next 12 months, given our view that 
current debt trading levels and elevated leverage metrics could hinder 
refinancing of the company's secured notes.

We could lower the ratings if we expect a default or restructuring within 12 
months. We believe such a scenario is possible if the company is unable to 
sustain the generation of positive free operating cash flow and has to borrow 
more on its ABL, resulting in only $10 million or less of availability. That 
would cause the covenant to be triggered and liquidity to become constrained, 
resulting in our expectation of a near-term covenant default.

We could revise the outlook to stable or raise the rating if the company 
appears likely to refinance its looming debt maturities. Such a scenario could 
occur if market conditions improve with higher lumber prices and Northwest 
Hardwoods' ability to significantly improve its lumber margins, resulting in 
at least a 200 bps improvement in gross margins over our forecast, and EBITDA 
interest coverage exceeding 2x.
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