The Cook & Boardman Group LLC Outlook Revised To Negative On Expectation For Reduced Demand And Elevated Leverage

  • The effects of social distancing on consumer spending and, subsequently, business investment will likely cause U.S. GDP to contract by 6% in the second quarter of 2020 and remain flat for full-year 2020.
  • We view the end-market demand for The Cook & Boardman Group LLC's products and services as susceptible to disruption as the coronavirus pandemic slows the pace of commercial construction and repair and replacement activity.
  • Therefore, we expect the company to see signs of depressed end-market demand beginning in the second quarter of 2020, which will lead its organic sales to contract for full-year 2020. However, we anticipate that its consolidated sales will increase by the mid- to high-single digit percent area when accounting for the acquisitions it completed in 2019 and 2020.
  • We are revising our outlook on Cook & Boardman to negative from stable and are affirming our 'B' issuer credit rating on the company.
  • The negative outlook reflects our view that the decline in the company's revenue, relative to our previous assumptions, will curtail its EBITDA generation and increase its adjusted debt to EBITDA toward or past 7x as of the end of 2020.
FARMERS BRANCH (S&P Global Ratings) March 24, 2020-- S&P Global Ratings today took the rating actions listed above.
Our economists forecast a recession occurring in the first half of 2020 as the spread of the coronavirus reduces consumer spending and business investment.  Our economists project that U.S. GDP will decline by 1% in the first quarter of 2020 before contracting by a steeper 6% in the second quarter, which would officially put the economy in a recession (for more information, please see "A U.S. Recession Takes Hold As Fallout From The Coronavirus Spreads," published March 17, 2020).
The negative outlook on Cook & Boardman reflects our view that the company will report debt to EBITDA in the 6.7x-7.2x range, FFO to debt in the 5%-10% range, and interest coverage in the 2.0x-2.5x range as of the end of 2020. We expect the coronavirus pandemic to depress Cook & Boardman's end-market demand in the short term, at a minimum.
We could downgrade Cook & Boardman if disruptions due to the coronavirus pandemic lead its consolidated sales to contract or shrink its EBITDA margin by 50 basis points over the next 12 months, which would cause the company's leverage to remain above 7x. The length and severity of the recession will only determine how much, and not if, commercial building construction--a significant source of the company's revenue--will be curtailed. We could also downgrade Cook & Boardman if it assumes a more aggressive financial policy due to its financial sponsor (for instance, increased debt-financed acquisitions or dividends). In the current environment, we would view any additional debt-financed acquisitions as a trigger for a downgrade.

Given the company's small size and niche product focus, we view an upgrade as unlikely unless it significantly expands its size and diversifies its business in terms of products and end markets, possibly through acquisitions. We would only raise our rating if the company deleveraged below 4x and were confident that its financial-sponsor owner would allow it to maintain its leverage at this level.
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