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Rating Action:

Moody's assigns B1 rating to U.S. Silica's proposed credit facility; outlook is stable

05 Apr 2018

New York, April 05, 2018 -- Moody's Investors Service ("Moody's") assigned a B1 rating to US Silica Company, Inc.'s ("U.S. Silica") proposed $1.38 billion credit facility, which consists of a $100 million revolver due 2023 and a $1.28 billion Term Loan B due 2025. At the same time, Moody's affirmed U.S. Silica's Corporate Family Rating ("CFR") at B1 and its Probability of Default Rating at B1-PD. The Speculative Grade Liquidity rating was also affirmed at SGL-2. The outlook remains stable.

On March 23, 2018, U.S. Silica announced that it was acquiring EP Minerals, LLC ("EP") for $750 million, and that the company would finance the transaction and refinance its existing debt through a new seven year, $1.28 billion Term Loan B credit facility and an expanded $100 million revolving credit facility. The $560 million senior secured facility rated B1 will be withdrawn upon closing of the proposed credit facility.

Assignments:

..Issuer: US Silica Company, Inc.

....Senior Secured Bank Credit Facility, Assigned B1 (LGD3)

Affirmations:

..Issuer: US Silica Company, Inc.

.... Probability of Default Rating, Affirmed B1-PD

.... Speculative Grade Liquidity Rating, Affirmed SGL-2

.... Corporate Family Rating, Affirmed B1

Outlook Actions:

..Issuer: US Silica Company, Inc.

....Outlook, Remains Stable

RATINGS RATIONALE

The acquisition of EP expands U.S. Silica's platform with more stable industrial and application end markets, while increasing diversification across products, customers and geographies. The EP business provides added revenue stability to the company's existing Industrial and Specialty Products ("ISP") segment, which will buffer against any deterioration in the Oil and Gas segment that might occur in the future. However, the company will increase its debt leverage significantly as a result of the transaction.

Pro forma for the EP acquisition, adjusted debt-to-EBITDA will increase to about 4.1x from 2.4x from year-end 2017, then decline closer to 3.0x by year-end 2018 largely through EBITDA growth in the Oil and Gas segment. Operating margin will also benefit from EP's high margin business and growing margins in the Oil and Gas and ISP segments. We expect adjusted operating margin to grow closer to 19% in 2018. Adjusted debt to book capitalization was at 36.3% at year-end 2017, but will increase above 50% as a result of increased balance sheet debt. The term loan, however, provides flexibility for the company to reduce debt. The facility amortizes at 1% per annum, and has a mandatory prepayment provision of 50% of excess cash flow beginning in 2019, which steps down to 0% if Consolidated Leverage Ratio (as defined in the facility) is less than 1.75x. We expect debt to decrease because the company is projected to generate significant free cash flow beginning in 2019, once its two in-basin facilities are fully operational.

U.S. Silica's ratings reflect its strong market positions in the frac-sand industry and as one of the largest producers of silica and other engineered materials derived from industrial minerals in North America. The ratings are also supported by its extensive proven and probable reserves, strategically located quarries and production facilities, developed logistical network from mine gate to well site, and long-standing customer relationships. Importantly, the rating also considers stable contribution margin from U.S. Silica's Industrial and Specialty Products ("ISP") segment and, now, the EP Minerals, LLC (EP) segment, which combined represent approximately 28% of total pro forma revenue for 2017.

The credit profile also reflects the company's exposure to cyclical end markets and reliance on the hydraulic fracturing industry for the majority of its revenue and operating income. Importantly, our credit view incorporates the volatility in operating performance associated with the company's key oil and natural gas end markets which experienced prolonged and material weakness in 2015 and 2016. We expect key credit metrics will continue to improve on the strength of frac-sand demand, increasing volumes, stable-to-improving prices, and healthy end market conditions.

U.S. Silica's SGL-2 reflects the company's good liquidity position over the next 12-18 months, supported by approximately $300 million in cash on hand and $90 million of revolver availability expected at the EP closing. The company will have a $100 million senior secured revolving credit facility which expires in 2023. At December 31, 2017, the company had $385 million of cash-on-hand and no borrowings outstanding under its $50 million revolver. Revolver availability was $45 million, reflecting $4.5 million allocated for letters of credit as of year-end 2017. The company has no near term debt maturities. The $1.28 billion Term Loan Facility matures 2025. We note that the company has a history of maintaining strong liquidity, even through the challenges of 2015 and 2016.

The stable outlook reflects favorable supply/demand dynamics and our expectation that adjusted operating income and key credit metrics will improve from higher volumes and stable pricing. The stable outlook also assumes that U.S. Silica will maintain ample liquidity to fully cover its annual fixed costs and fund its growth initiatives.

Moody's indicated that the ratings could be upgraded if adjusted debt to tangible book capitalization is maintained under 50%, adjusted EBIT-to-interest is sustained well above 3.0x, and adjusted operating margin approaches 25%. A rating upgrade would also require robust liquidity, strong free cash flow generation, and healthy oil and natural gas end markets.

The ratings could be downgraded if adjusted EBIT-to-interest declined below 2.5x, adjusted operating margin deteriorates, or adjusted debt to tangible book capitalization increases above 60%. In addition, a ratings downgrade could result from a deterioration in liquidity or weakened financial flexibility, possibly due to aggressive growth, large debt-funded acquisitions or shareholder friendly activities.

The principal methodology used in these ratings was Building Materials Industry published in January 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Based in Frederick, Maryland, U.S. Silica operates 20 silica mining and processing facilities and is one of the largest producers of silica and engineered materials derived from industrial minerals in North America. The company holds approximately 765 million tons of reserves, including 323 million tons of API spec frac sand. After the acquisition of EP, U.S. Silica will gain control of 7 plants that process diatomaceous earth (DE), perlite and mineral clay. U.S. Silica is currently organized into two segments: (1) Oil & Gas Proppants (Oil & Gas), which serves the oil & gas exploration and production industry, and (2) Industrial & Specialty Products (ISP), which serves the foundry, automotive, building products, sports and recreation, glassmaking and filtration industries. EP sells its products to a diverse set of customers primarily providing DE for filtration purposes, from food and beverage to biofuels end markets. In 2017, U.S. Silica generated $1.2 billion of revenue, 80% from Oil & Gas and 20% from ISP. Pro forma for EP, the combined businesses generated $1.4 billion of revenue in 2017.

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.

Karen Nickerson
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Glenn B. Eckert
Associate Managing Director
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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