Specialty Building Products Holdings LLC Downgraded To 'B-' On Impact From COVID-19 And Recessionary Pressures

  • We expect the COVID-19 outbreak and the recessionary macroeconomic conditions to hamper Specialty Building Products Holdings LLC's revenues and earnings.
  • Given our forecast for a U.S. recession, previous expected improvements in credit measures will likely be beyond our one-year time horizon.
  • We now expect debt to EBITDA will likely remain elevated and deteriorate to over 8x, with EBITDA interest coverage of about 1.5x, levels commensurate with the 'B-' rating.
  • Thus, we are lowering our issuer credit rating on Specialty to 'B-' from 'B'.
  • At the same time, we are lowering our issue-level ratings on its senior secured debt to 'B-' from 'B'.
  • The negative outlook reflects the risk that leverage and coverage measures could possibly deteriorate further, depending on the impact of recessionary pressures over the next 12 months.
CENTENNIAL (S&P Global Ratings) March 27, 2020--S&P Global Ratings today took the rating actions listed above.
The downgrade of Specialty Building Products Holdings LLC to 'B-' reflects its adjusted leverage of over 7x and EBITDA interest coverage of 1.3x for the 12 months ended Sept. 30, 2019. While we expected improvement in leverage and coverage ratios in fourth-quarter 2019 and first-quarter 2020, with the COVID-19 outbreak and the rapid slowdown in economic activity we believe revenues and earnings will likely contract in 2020 instead of growth. As a result, we expect credit measures will remain pressured in 2020.
Our negative outlook on Specialty reflects its high leverage and low interest coverage metrics, with the heightened risk that these may remain worsen over the next 12 months given recessionary conditions. At the same time, we believe the company's earnings and cash flows will be sufficient to meet its obligations, such that EBITDA interest coverage stays around 1.5x and liquidity remains adequate.
We could lower the rating over the next 12 months if recessionary macroeconomic conditions result in greater-than-expected deterioration in earnings, such that EBITDA interest coverage begins trending toward 1x or leverage rises above 9x, at which point we may view the capital structure as unsustainable. We could also lower the rating if Specialty's liquidity is severely affected and the covenant headroom tightens, causing us to view the liquidity as less than adequate.
Though unlikely in the current macroeconomic environment, we may revise the outlook to stable over the next 12 months if business conditions improve and the company can maintain leverage below 8x, with EITDA interest coverage trending toward 2x.
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