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Rating Action:

MOODY'S ASSIGNS Ba3 TO 144A SR. NOTES OF BUILDING MATERIALS CORPORATION OF AMERICA; CONFIRMS OTHER RATINGS

15 Oct 1997
MOODY'S ASSIGNS Ba3 TO 144A SR. NOTES OF BUILDING MATERIALS CORPORATION OF AMERICA; CONFIRMS OTHER RATINGS New York, 10-15-97 -- Moody's Investors Service assigned a Ba3 rating to Building Materials Corporation of America's (BMCA) proposed issue of $100 million of senior unsecured notes, due 2007. Moody's also confirmed the Ba3 ratings on the company's 11.75% senior deferred notes, 8.625% senior notes, and $75 million unsecured revolving credit facility.

The Ba3 ratings reflect BMCA's increased leverage, future declines in equity as retained earnings are upstreamed to the parent, intense competition, the risks associated with integrating past acquisitions and pursuing new ones, and the $115 million receivable sales program. However, these risks are offset by the company's leading market position in residential roofing materials; its stable growth and favorable industry dynamics; and improving operating efficiency.

Proceeds of the new notes offering will be used for a new roofing manufacturing facility, a new glass mat manufacturing facility, expansion of the company's felt manufacturing capacity, and for general corporate purposes. The new residential roofing plant, should reduce transportation costs, inventory levels, and shorten lead times, improving margins. The new million glass mat production facility and the expansion of felt manufacturing capacity will satisfy internal and external demand. Incremental cash flow is expected starting in 1999 when these projects are expected to be completed.

Although BMCA's book equity was $134 million as of June 30, 1997, equity will be reduced as cash is upstreamed to its parent, GAF Corporation, to satisfy future asbestos liability payments. After considering goodwill of $70 million and the cash to be upstreamed to GAF, tangible book equity becomes negative, resulting in a debt-to-book capitalization of 102%. Total debt will increase from $413 million to $513 million proforma for the offering.

Securities investments of $111 million – which comprise the bulk of the $123 million of cash and investments in securities on the company's balance sheet -- have contributed significantly to net income over the last 18 months. For the first six months of 1997, BMCA booked a $8.9 million pre-tax gain, which made up close to 75% of net income. Half of these investments will be unavailable for debt service in the future as they will be upstreamed to the parent.

Furthermore, Moody's believes that the cash that is available to the company is more likely to be spent on additional capital investments and acquisitions rather than to pay down debt, given the company's track record. BMCA has completed five acquisitions with an aggregate purchase price of $100 million since 1994. New acquisitions would keep leverage high and introduce additional integration risks.

Stable cash flow from operations, augmented by interest deferral from the 11-3/4% notes, has allowed BMCA to fund a strong capital investment program during the last few years. Since 1991, BMCA has invested over $125 million to both increase capacity and to implement process improvements to reduce manufacturing costs.

Total sales for 1996 reached $852 million, a 24% jump from 1995. The USI acquisition accounted for 60% of the increase, while higher volumes and average residential selling prices contributed the balance. Over the past four years BMCA has had a compounded annual growth rate of 13.2% Sales have continued to improve over the first six months of 1997, up 13% over the first 6 months of 1996.

EBITDA also has had a strong compounded annual growth rate of 21.7% over the past four years due primarily to; improving gross margins over the last two years, emphasis on higher margin premium products, aggressive marketing efforts and strict cost controls.

The U.S. roofing industry has been consolidating since the early 1980s. As a result, the number of manufacturers has been reduced and industry capacity utilization has slowly turned up. The roofing industry continues to be competitive, but unit volume growth has been steady due to the strength of the replacement market and new products. This trend is likely to continue and should favor BMCA, which is the largest U.S. manufacturer of laminated shingles for the residential market. In the commercial roofing market, BMCA leads in the modified bitumin segment

The securities will be offered and sold in privately negotiated transactions without registration under the Securities Act of 1933, under circumstances reasonably designed to preclude a distribution in violation of the Act. The issuance has been designed to permit resale under SEC Rule 144A.

Building Materials Corporation of America, headquartered in Wayne, New Jersey, is a leading U.S. manufacturer of asphalt roofing products.

No Related Data.
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