Patrick Industries Inc. Ratings Placed On CreditWatch Negative Due To COVID-19 Impact

  • Restrictions on movement and daily life have significantly reduced the production capacity of recreational vehicle, marine, and construction companies in the U.S. and Europe. These restrictions will also likely translate to reduced consumer demand over at least the coming weeks and months. In addition, our economists currently forecast that the U.S. and Europe will likely be in a recession starting in second-quarter 2020, which will further burden consumer confidence and demand for big-ticket discretionary purchases such as RVs.
  • We are placing all ratings on Patrick Industries Inc., including the 'BB-' issuer credit rating, on CreditWatch with negative implications.
  • The CreditWatch placements reflect significant anticipated stress on revenue and cash flow over at least the next several weeks, and possibly months, which could use liquidity, materially reduce EBITDA this year even in a recovery scenario, and result in a spike in leverage. We could lower the ratings over the next few months, or sooner, if we no longer believe COVID-19 containment could occur by about the end of second-quarter 2020 so that consumer demand in Patrick's end markets could begin to recover.
NEW YORK (S&P Global Ratings) March 26, 2020—S&P Global Ratings today took the rating actions above. The CreditWatch listings reflect a significant anticipated decline in revenue and cash flow due to production suspensions at Patrick and several of its large customers. In addition, we believe there is a high level of uncertainty in Patrick's four customer end markets over the next several months as the U.S. grapples with the containment of COVID-19, and the impact that an anticipated U.S. and European recession would have on revenue through 2021. Patrick is currently suspending operations at certain plants for up to two weeks depending on government requirements and the needs of the company's specific end markets, some of which may be deemed essential. A number of Patrick's key original equipment manufacturer customers have also announced partial or substantial temporary factory suspensions in response to COVID-19, including Thor, Winnebago, Skyline Champion, and Brunswick. We have assumed the production suspensions could last longer than the currently announced suspension plans given our current base case for virus containment later in the second quarter. We believe these factory suspensions could substantially affect Patrick's revenue at least in second-quarter 2020. In addition, our economists anticipate a recession to cause a severe GDP and consumer spending decline in the second quarter, likely affecting all of Patrick's end markets to varying degrees. We believe there will probably be a more immediate impact on big-ticket discretionary purchases such as RVs and leisure boats, followed by an impact on the manufactured housing and industrial end markets, which typically experience a lagged impact because suppliers such as Patrick trail real estate developers by some months in terms of order patterns.
The CreditWatch placements reflect significant anticipated stress on revenue and cash flow over at least the next several weeks, and possibly months, which could use liquidity, materially reduce EBITDA this year even in a recovery scenario, and result in a spike in leverage. We could lower the ratings over the next few months, or sooner, if we no longer believe COVID-19 containment could occur by about the end of second-quarter 2020 so that consumer demand in Patrick's end markets could begin to recover. Because there is currently a high degree of uncertainty in our updated assumptions, we could also lower the rating if we do not expect Patrick to recover following a significant spike in leverage in 2020 and reduce our measure of leverage in 2021 to under our 4x downgrade threshold.
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