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Rating Action:

Moody's affirms Armstrong's B1 CFR; rating outlook changed to stable from negative

03 Feb 2016

Approximately $1.05 billion of rated debt affected

New York, February 03, 2016 -- Moody's Investors Service affirmed Armstrong World Industries, Inc.'s B1 Corporate Family Rating and B1-PD Probability of Default Rating, and changed its rating outlook to stable from negative as the company completes its tax-free spinoff of its flooring business to shareholders, in order to focus on ceiling and related products. In related rating actions, Moody's assigned a B1 rating to the company's senior secured bank credit facility. Proceeds from the proposed bank credit facility, cash on hand, and a $50 million dividend from Armstrong Flooring Inc. will be used to replace Armstrong's existing bank credit facility, at which time the ratings under this facility will be withdrawn.

Armstrong's proposed bank credit facility will consist of a $200 million senior secured revolving credit facility expiring 2021, a $600 million senior secured Term Loan A maturing 2021, and a $250 million senior secured Term Loan B maturing 2023. The company's capital structure also has a $50 million accounts receivable securitization facility (unrated) and about $35 million of industrial revenue bonds.

The following ratings/assessments were affected by this action:

Corporate Family Rating affirmed at B1;

Probability of Default Rating affirmed at B1-PD;

Senior Secured Revolving Credit Facility due 2021 assigned B1 (LGD3);

Senior Secured Term Loan A due 2021 assigned B1 (LGD3);

Senior Secured Term Loan B due 2023 assigned B1 (LGD3);

Speculative Grade Liquidity Rating affirmed at SGL-2.

RATINGS RATIONALE

Armstrong's B1 Corporate Family Rating incorporates its mixed operating performance due to a lack of earnings from overseas operations. The company has invested about $160 million in facilities in China and Russia, which are both undergoing contraction. Moody's anticipates time spent by Armstrong righting its overseas operations will be substantial and could result in additional expenditures for cost reduction, idling excess capacity, or write-downs for past investments that are underperforming. Non-residential construction, Armstrong's primary end market, has shown some growth in recent months but it remains sluggish relative to domestic new housing construction. Armstrong will not be a substantial beneficiary from the higher expected growth in US new housing, since the market only represents about 5% of the company's total sales.

Providing an offset to Armstrong's credit challenges are debt credit metrics that are solid relative to the B1 Corporate Family Rating. Following the tax-free spinoff of the flooring business to shareholders, scheduled for April 1, 2016, Armstrong will generate lower levels of absolute earnings but will do so with robust operating margins. Moody's projects modest organic growth in Armstrong's domestic business, the only driver of earnings at this time, resulting in EBITA margins nearing 16.5% over the next 12-18 months. Further, Moody's estimates interest coverage (measured as EBITA-to-interest expense) of about 5.0x and debt leverage nearing 3.25x over the same timeframe (all ratios incorporate Moody's standard adjustments), incorporating better operating performance and about $100 million in lower balance sheet debt. The WAVE JV will remain a critical earnings and cash contributor for Armstrong. Armstrong's good liquidity profile is supported by the company's ability to generate positive free cash flow throughout the year as well as maintain good availability under its revolving credit facility. Moody's anticipates the company will have ample financial flexibility to meet its basic cash requirements as well as support higher levels of working capital and capital expenditure needs as its business grows.

The change in rating outlook to stable from negative reflects the certainty now in Armstrong's debt capital structure, and our expectations that the company will continue to post solid debt credit metrics relative to the B1 Corporate Family Rating over the next 12-18 months. Good liquidity gives Armstrong the ability to contend with its overseas operations and lackluster results.

The B1 rating assigned to the $1.05 billion senior secured bank credit facility, the same rating as the Corporate Family Rating, results from it being the preponderance of debt in Armstrong's capital structure. The revolving credit facility and term loans are pari passu to each other in a recovery scenario.

Positive rating actions could ensue if Armstrong benefits from an improved end market and successful progress in its overseas operations, resulting in operating performance that exceeds Moody's forecasts. A better liquidity profile or the following credit metric could support positive actions (ratios include Moody's standard adjustments):

- Free cash flow-debt sustained near 7.5% (6.0% for LTM 3Q15)

Negative rating actions could occur if Armstrong's operating performance falls below our expectations, resulting in the following credit metrics (ratios include Moody's standard adjustments) and characteristics:

- EBITA-to-interest expense sustained near 3.0x

- Debt-to-EBITDA remaining above 4.5x

- Deterioration in the company's liquidity profile

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of this methodology.

Armstrong World Industries, Inc. ("Armstrong"), headquartered in Lancaster, PA, is a North American manufacturer and distributor of ceiling systems for use primarily in the construction and renovation of commercial and institutional buildings. ValueAct Group is the majority shareholder of Armstrong, owning about 17% of the company's stock. Revenues for the 12 months through December 30, 2015 totaled approximately $1.3 billion on a pro forma basis following the spin-off of its flooring business.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Doyle
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Armstrong's B1 CFR; rating outlook changed to stable from negative
No Related Data.
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