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Rating Action:

Moody's assigns B2 CFR to LBM Acquisition, senior secured term loans rated B2; senior notes rated Caa1; outlook stable

02 Dec 2020

New York, December 02, 2020 -- Moody's Investors Service (Moody's) assigned a B2 Corporate Family Rating (CFR) and B2-PD Probability of Default Rating to LBM Acquisition, LLC dba US LBM, which will be the successor to LBM Borrower, LLC. Moody's also assigned a B2 rating to the proposed senior secured term loan and senior secured delayed draw term loan and a Caa1 rating to the proposed senior unsecured notes due 2028. The outlook is stable.

Bain Capital Private Equity, LP (Bain), through its affiliates, is acquiring US LBM for about $2.8 billion from affiliates of Kelso & Company. US LBM's capital structure will consist of a $500 million asset based revolving credit facility expiring in 2025 with almost $200 million outstanding at closing, a $1.2 million senior secured term loan maturing 2027 and $390 million in unsecured notes due 2028. The $300 million senior secured delayed draw term loan maturing 2027 will be undrawn at closing and used to fund future acquisitions. Proceeds from the borrowings and a $1.085 billion cash contribution in the form of common equity from Bain will be used to acquire US LBM and repay the company's existing debt of about $970 million.

"Despite Bain's sizeable equity contribution, which represents almost 40% of the acquisition price, US LBM will remain highly leveraged through 2021," according to Peter Doyle, a Moody's VP-Senior Analyst.

When the financing transaction closes and all related debt obligations are repaid, Moody's will withdraw all existing ratings of LBM Borrower, LLC, including its B2 CFR, B2-PD PDR, SGL-3, and the B2 senior secured first lien term loan rating and Caa1 senior secured second lien term loan rating. Moody's will also withdraw LBM Borrower's stable outlook.

The following ratings are affected by today's action:

Assignments:

..Issuer: LBM Acquisition, LLC

.... Corporate Family Rating, Assigned B2

.... Probability of Default Rating, Assigned B2-PD

....Senior Unsecured Regular/Bond Debenture, Assigned Caa1 (LGD6)

....Senior Secured First Lien Delayed Draw Term Loan, Assigned B2 (LGD4)

....Senior Secured First Lien Term Loan, Assigned B2 (LGD4)

Outlook Actions:

..Issuer: LBM Acquisition, LLC

....Outlook, Assigned Stable

RATINGS RATIONALE

US LBM's B2 CFR reflects Moody's expectation that the company will remain highly leveraged. At closing, total adjusted debt is increasing by almost 60% to about $2.0 billion from $1.3 billion at Q3 2020. Moody's projects adjusted debt-to-LTM EBITDA will improve to 5.8x at year-end 2021 from pro forma 6.5x at Q3 2020. Moody's projects adjusted free cash flow-to-debt in the range of the 2% - 5% in 2021. Debt service requirements including cash interest payments and term loan amortization will slightly exceed $100 million per year, constraining free cash flow and reducing financial flexibility. At the same time US LBM will face challenges integrating future acquisitions, which are to be funded with proceeds from the senior secured delayed draw term loan, and intense competition.

Providing an offset to the US LBM's leveraged capital structure is reasonable profitability. Moody's forecasts adjusted EBITDA margin in the range of the 7.5% - 10% for 2021, which is the company's greatest credit strength. Profitability will benefit from higher volumes from growth in end markets, resulting operating leverage from that growth and the result of previous investments in SG&A to meet future demand for its products. Moody's projects revenue will grow to $4 billion for 2021 from pro forma $3.8 billion for LTM Q3 2020. Moody's also calculates interest coverage, measured as EBITA-to-interest expense, will be around 2.2 x in late 2021, which is reasonable given the company's considerable interest expense.

Also, Moody's forecasts that US LBM will have good liquidity over the next two years, which is another key credit strength. Substantial revolver availability and no near-term maturities provide more than ample financial flexibility for US LBM to integrate bolt on acquisitions and to contend with volatility in end markets.

The domestic construction end markets, the driver of US LBM's revenue, are showing resiliency during the coronavirus outbreak and resulting economic concerns. New home construction accounts for about two thirds of US LBM's revenue. Moody's has a stable outlook for the US Homebuilding sector with modest growth expected. Repair and remodeling activity, representing approximately 20% of revenue, is exhibiting strong growth. As a national distributor with diverse product offerings, US LBM should benefit from high levels of spending in these end markets.

Governance characteristics we consider in US LBM's credit profile include an aggressive financial strategy, evidenced by high leverage. Moody's expects that the company will pursue bolt-on acquisitions to build scale, using the senior secured delayed draw term loan as the primary source of funding. In addition the company will likely use its revolver credit facility and free cash flow to fund acquisitions. US LBM's Board of Directors has yet to be finalized. Moody's believes that there will be at least one independent director but control will likely reside with the private equity sponsor.

The stable outlook reflects Moody's expectation that US LBM's interest coverage will remain above 1.5x. A good liquidity profile and Moody's expectation that US LBM will successfully integrate future acquisitions without impacting operations further supports the stable outlook.

The B2 rating assigned to US LBM's senior secured term loan and delayed draw term loan, the same rating as the Corporate Family Rating, results from their subordination to the company's asset based revolving credit facility but priority claim relative to the company's senior unsecured notes. The term loans have a first lien on substantially all noncurrent assets and a second lien on assets securing the company's asset based revolving credit facility (ABL priority collateral).

The Caa1 rating assigned to the company's senior unsecured notes due 2028, two notches below the Corporate Family Rating, results from their subordination to the company's considerable amount of secured debt.

The senior secured term loan is expected to contain certain covenant flexibility for transactions that can adversely affect creditors. An incremental secured facility can be incurred up to the greater of $306 million and an amount equal to 100% of pro forma consolidated EBITDA plus an amount up to pro forma 4.5x first lien net leverage. The company may increase unsecured indebtedness without causing the pro forma interest coverage ratio to be less than 2.0x or pro forma consolidated total net leverage ratio (as defined in the credit agreement) to exceed 6.30x. The EBITDA definition includes add-backs such as equity based compensation, non-cash lease expenses, sponsor management fees, and pre-acquisition results for historical acquisitions.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade:

(All ratios incorporate Moody's standard adjustments)

» EBITA-to-interest expense is sustained above 2.5x

» Debt-to-LTM EBITDA is maintained below 5.0x

» A good liquidity profile is preserved enhanced by improved free cash flow generation and reduced borrowings under the revolving credit facility

Factors that could lead to a downgrade:

(All ratios incorporate Moody's standard adjustments)

» EBITA-to-interest expense is sustained below 1.5x

» Debt-to-LTM EBITDA is expected to stay above 6.0x

» The company's liquidity profile deteriorates

US LBM, headquartered in Buffalo Grove, Illinois, is a North American distributor of building materials. US LBM is privately owned and does not disclose financial information publicly.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

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

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

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: 1 212 553 0376
Client Service: 1 212 553 1653

Dean Diaz
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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