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01 Mar 2004
MOODY'S AFFIRMS RATINGS AND OUTLOOK OF BMCA
Moody's Investors Service affirmed all of the ratings and the stable ratings outlook of Building Materials Corporation of America (BMCA), including its B2 senior implied rating, B2 rating on four issues of public senior second secured notes, and Caa1 senior unsecured issuer rating.
The stable ratings outlook reflects Moody’s expectation that developments on the legal front are not likely to be material in the next 12 months. Should the improvement in the credit profile continue as it has for the past three years, an upgrade in the outlook and/or ratings may be possible.
The ratings consider the uncertainties from BMCA’s parent company, G-I Holdings Inc (G-I), as G-I works its way through Chapter 11 bankruptcy proceedings. These uncertainties include the ultimate ownership of BMCA and whether asbestos litigants will be able to substantively consolidate BMCA with G-I Holdings by imposing successor liability on BMCA for asbestos claims against its parent. To date, G-I and BMCA have been successful in preventing asbestos claims from being asserted against BMCA. The ratings also reflect the company's negative book and tangible net worth positions and the structural subordination of the senior notes to the company's bank credit facility.
At the same time, the ratings acknowledge the steady and significant improvement in the company's operating results, liquidity, and credit protection measures since December 2000, at which time its ratings were downgraded and kept on review for further downgrades. Despite the legal distractions, the company has remained focused on operations, as evidenced by three consecutive years of record revenues and operating income. In addition, the ratings incorporate the company's strong brand franchise, its growing, industry-leading market position, and its generally strong free cash flow generating ability, which has enabled the company to reduce debt significantly over the last three years.
There are two separate legal issues that constrain BMCA’s current ratings. The first is that BMCA's parent company, G-1 Holdings Inc., filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code on January 5, 2001 due to mounting asbestos claims. When a plan of reorganization is finally confirmed, which is expected to take some additional, indeterminate period of time, the ultimate allocation of the value of BMCA between and among asbestos claimants, creditors, and shareholders will be determined.
The second legal issue pertains to substantive consolidation, which the G-I Holdings’ Creditors Committee is trying to establish by seeking to impose successor liability on BMCA. BMCA has had success so far in the courts, winning a temporary restraining order in 2001, later changed to a preliminary injunction, that prohibited any existing or future asbestos claimant from bringing suit against BMCA, pending determination of the successor liability issues or confirmation of G-I Holdings’ Chapter 11 plan of reorganization. In addition, on March 21, 2001 BMCA successfully defended the attempt by the Creditors Committee to have the court order interim substantive consolidation of BMCA and G-I Holdings during the 90 day preference period of the liens having been granted to BMCA’s banks and bondholders.
The issue of successor liability and substantive consolidation is still being litigated and is in the discovery stage. On a related point, in November 2002, the Creditors Committee, joined by the legal representative of future demand holders, filed a motion for appointment of a trustee in the G-I Holdings’ bankruptcy proceedings. In December 2002, the bankruptcy court denied this motion. In July 2003, the U.S. District Court upheld the bankruptcy court. This issue is currently being appealed to the Third Circuit Court of Appeals by the Creditors Committee (but not the futures demand representative). Even assuming the appeal results in a trustee’s being appointed, the trustee may decide not to seek substantive consolidation. Under any scenario, if substantive consolidation were ultimately to be ordered, the substantive consolidation would have to be made retroactive to the G-I Holdings’ bankruptcy filing in order for the liens to be avoided. And, even in the event that this should occur, the bondholders would still have defenses to any action to avoid the liens.
Separately, with regard to a potential tax claim against G-I Holdings that has been pending since 1997, the ratings consider that G-I may be unable to satisfy this liability, in which case BMCA could be severally liable for approximately $40 million in taxes plus interest. In the event that BMCA were to become liable, a negative rating action could result.
Also incorporated into the ratings are the company's negative book and tangible net worth, resulting from the write-off in 2000 of $106.2 million of receivables from G-I. The write-off left BMCA with negative book equity of $77.9 million at year-end 2000 and negative tangible equity of $143.2 million. With strong earnings, these measures have improved since 2000 and are expected to continue to improve in the future.
Finally, the ratings also reflect the structural subordination of the four separate issues of senior notes to the bank credit facility. In December 2000, BMCA arranged for a new $100 million bank credit facility on top of its existing $110 million line and extended the maturity of both facilities for one year (to August 2003), in large part to protect the company from any perceived impact from its parent's bankruptcy. The company gave the banks a first priority lien on substantially all of its assets. The holders of some $540 million of publicly-traded senior notes were given a second priority lien on BMCA's assets. In July 2003, the company arranged a new $350 million senior secured bank credit facility. This facility is used largely for seasonal working capital needs. Thus Moody's feels that there is no need at this time to notch the senior notes below the senior implied rating. Should BMCA begin tapping the bank facility in a measurable way, either for acquisitions or for other reasons, the ratings on the senior notes could come under pressure.
Despite the legal uncertainties, BMCA’s management remains focused on growing the business. BMCA recorded an 18% increase in revenues in 2003, a 15% increase in operating income, and a 45% increase in net income, each of which represented record levels for the company. This strong performance came on top of strong gains in 2001 and 2002 for revenues, operating and net income. Credit statistics for BMCA have improved significantly since the company was downgraded in 2000. EBIT coverage of interest was 2.4x in 2003 compared to 2.1x in 2002, 1.6x in 2001, and 1.1x in 2000. Total debt/EBITDA (including an accounts receivable securitization facility) was 3.2x for 2003 compared to 5.0x in 2002, 5.3x in 2001, and 6.8x in 2000. Debt/capitalization still exceeded 100% due to BMCA’s negative book equity. Return on assets soared to 17.2% and was more than double the 8% in 2000.
BMCA is believed to be number one in sales of laminated roof shingles, a product that it developed, and number two in sales of strip shingles to the residential roofing market. BMCA believes that it is the only major national manufacturer of both residential and commercial materials, providing a full range of products and roofing systems for use in roofing installation. BMCA’s performance should continue to benefit from strong industry fundamentals, including the strong re-roofing market, which accounts for approximately 80% of industry sales. This serves to minimize the cyclical impact of economic downturns.
Free cash flow has been strong and has been used to repay debt. In 2003, the company repaid its $115 million accounts receivable securitization facility, $35 million of senior notes and $7 million of other senior indebtedness. Despite capacity additions anticipated over the next few years, BMCA should continue to be a positive free cash flow generator in 2004 and beyond, which should further improve credit quality and liquidity.
Headquartered in Wayne, New Jersey, Building Materials Corporation of America is a leading national manufacturer of a broad line of asphalt roofing products and accessories for the residential and commercial markets. Incorporated under the laws of Delaware in 1994, the company is an indirect, wholly-owned subsidiary of G-I Holdings Inc., whose principal beneficial owner is Samuel Heyman. Revenues, operating income, and net income in 2003 were $1.6 billion, $135 million, and $47 million, respectively.
No Related Data.
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