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Rating Action:

MOODY'S ASSIGNS Ba3 TO PROPOSED $125 MILLION SR. NOTES OF BUILDING MATERIALS CORP. OF AMERICA; CONFIRMS OTHER RATINGS

14 Jul 1998
MOODY'S ASSIGNS Ba3 TO PROPOSED $125 MILLION SR. NOTES OF BUILDING MATERIALS CORP. OF AMERICA; CONFIRMS OTHER RATINGS New York, 07-14-98 -- Moody's Investors Service assigned a Ba3 rating to Building Materials Corporation of America's (BMCA) proposed issue of $125 million of senior unsecured notes, due 2005. Moody's also confirmed the Ba3 ratings on the company's 11.75% senior deferred notes, 8.0% and 8.625% senior notes, and $75 million unsecured revolving credit facility. The outlook is stable.

The Ba3 ratings reflect BMCA's high leverage, potential for future declines in equity as retained earnings are upstreamed to the parent, a competitive market environment, 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 to purchase a portion of the $310 million 11.75% senior deferred notes. This is expected to reduce annual interest costs by $3.5 million. The remaining portion of the old notes are likely to be repurchased in July 1999, when they are callable, further reducing interest costs.

BMCA's total sales for 1997 reached $945 million, an 11% jump from 1996. Approximately 2/3 of the sales growth reflected increased unit volumes from both residential and commercial roofing products while the sales of The Leatherback acquisition (made in March 1997) contributed the balance. Over the past five years, BMCA has had a compounded annual growth rate of 13%. Sales have continued to improve over the first three months of 1998, up 10% over the same period last year.

EBITDA also has had a strong compounded annual growth rate of 22% over the past five 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.

EBITDA/interest at year-end 1997 was 2.6 times. However, when subtracting out capital expenditures, this drops to 1.5 times. Significant capital expenditures are expected to continue over the next few years. Pro forma for the twelve months ending March 29, 1998, EBITDA/interest is at 2.6 times.

Although BMCA's book equity was $81 million as of March 29, 1998, equity will likely 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 may become negative. However, it is expected that no dividends will need to be upstreamed in 1998. Total debt will be $565 million pro forma for the offering.

Securities investments of $194 million – which comprise the bulk of the $206 million of cash and investments in securities on the company's balance sheet as of March 29, 1998 -- have contributed significantly to net income over the past two years. For 1997, BMCA booked a $26.4 million pre-tax gain, which made up close to 31% of income before taxes and interest. A significant portion of these investments may be unavailable for debt service in the future as they will be spent on additional capital investments, acquisitions and dividends to parent. Since 1994, BMCA has completed six acquisitions with an aggregate purchase price of $140 million. These acquisitions should increase sales and operating income although it will keep leverage high and introduce additional integration risks.

Restricted payments included in the proposed $125 million indenture shall not exceed the sum of (1) 75% of the cumulative consolidated net income since April 1994, (2) 100% of cash proceeds from the issuance of stock, exercise of options or warrants, and conversion into capital stock, and (3) $60 million. This covenant is slightly weaker than the restricted payments test in the 8% and 8.625% Senior Notes. However the company must adhere to the tests in the earlier debt issues which have a longer maturity.

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 1994, BMCA has invested over $150 million to both increase capacity and to implement process improvements to reduce manufacturing costs.

The company spent $78 million in CAPEX and acquisitions in 1997, and expects to continue its stepped up level of investments in 1998. In October 1997 the company issued $100 million in 10 year Senior Notes with the proceeds to be used to build a new roofing manufacturing facility and a new glass mat manufacturing facility, along with expanding the company's felt manufacturing capacity. The residential roofing plant, should reduce transportation costs, inventory levels, and shorten lead times, improving margins. The new glass mat production facility and the expansion of felt manufacturing capacity will satisfy internal and external demand. These projects are important initiatives for the company and will be completed over the next year or two.

In June 1998, BMCA completed the acquisition of Leslie Building Products, Inc., which had 1997 sales of $90 million, for $44 million in cash. The acquisition permits BMCA to take Leslie's products and distribute them into its national distribution channel. Leslie manufactures and markets residential attic ventilation systems, metal and fiberglass air distribution products for the HVAC industry, ornamental iron security products (including doors, window guards and fencing), and door louvers and vision lite products for the architectural door market.

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 upwards. 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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