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Rating Action:

Moody's assigns a B3 CFR to CPG International Inc.; rates LBO financing

06 Sep 2013

$940 million of debt instruments rated

New York, September 06, 2013 -- Moody's Investors Services has assigned a B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating to low maintenance material building products manufacturer CPG International Inc. on its proposed $1.5 billion leveraged buyout. Moody's has also assigned a B2 rating to the $625 million proposed senior secured term loan, as well as a Caa2 rating to the $315 million proposed senior unsecured notes. The rating outlook is stable.

Proceeds from the new debt, as well as a $600 million combined equity contribution from Ares Management and the Ontario Teachers' Pension Plan, will fund the buyout from the current owner AEA Investors, and refinance existing debt.

Assignments:

- Issuer: CPG International Inc.

- Corporate Family Rating of B3

- Probability of Default Rating of B3-PD

- Proposed $625 million senior secured term loan due 2020 at B2 (LGD3, 39%)

- Proposed $315 million senior unsecured notes due 2021 at Caa2 (LGD5, 87%)

- Stable rating outlook

The ratings are contingent upon the receipt and review of final documentation

All of the ratings of predecessor CPG International I Inc., including its B2 CFR and ratings on existing bank debt, will be withdrawn upon completion of the proposed transaction and repayments of existing debt.

RATINGS RATIONALE

The B3 Corporate Family Rating ("CFR") reflects CPG's high leverage that will result from the sizeable amount of debt that will be used to fund the acquisition of the company. Debt of over $950 million (including Moody's standard adjustments) on close of the proposed transactions will represent nearly two times CPG's total revenue. Moody's estimates pro forma leverage (Debt to EBITDA) of over 8 times as of LTM June 30, 2013. The ratings also takes into account significant competition that CPG faces in the low maintenance building products segment, and exposure to the cyclical residential homebuilding and repair segment. However, the B3 CFR favorably considers CPG's strong market position, successful track record of deleveraging following debt-financed acquisitions (TimberTech), recovering end markets, and good liquidity.

The $625 million of term loan is rated B2, one notch above the CFR. This facility, along with the proposed $125 million ABL facility (not rated by Moody's), ranks senior to $315 million of unsecured notes in the application of Moody's Loss Given Default ("LGD") methodology. The term loan has a first priority lien on substantially all assets (excluding the ABL priority collateral, to which it holds a second priority interest), and benefits from upstream guarantees from all existing and future wholly owned domestic subsidiaries. The $125 million ABL revolver holds a first priority position on substantially all current assets or ABL priority collateral (as reference above).

The $315 million of senior unsecured notes are rated Caa2, which is two notches below the CFR. The lower rating reflects the impact that the sizeable amount of secured debt in the company's debt structure has on the implied recovery of these notes under LGD.

Moody's believes that CPG will maintain a good liquidity position in the near term. Although the company estimates to have a minimal cash balance on close of the proposed transactions, we expect that positive free cash flow generation will allow the company to restore modest cash reserves over the near term. Also, the company will have a $125 million ABL facility in place, due 2018, which Moody's assesses to be robust for a company of this size. It is expected that this facility will be undrawn on close, with about $88 million available after letters of credit usage. We note that the terms of the ABL facility include financial covenants that only become effective when availability under this facility falls to minimal levels. We further note that the term loan facility has no financial covenants. As such, Moody's believes that the company will not face any covenant restrictions over the foreseeable future.

The stable rating outlook reflects Moody's expectations that the company will maintain current margins with modest revenue growth over the near term. This would allow the company to generate sufficient free cash flow to repay a moderate amount of debt and gradually de-lever over that time. We estimate that the company's Debt to EBITDA will approach 7 times by 2014, while EBITA to Interest will remain above 1.5 times.

Ratings or their outlook could be adjusted downward if revenue levels decline materially due to weakness in demand for its key products, resulting in reduced margins and operating cash flow. Lower ratings could also result if the company were to undertake debt-financed acquisitions, or implement aggressive shareholder return policies, such as a debt-funded distribution initiative. Rating pressure could also occur if the company cannot reduce Debt to EBITDA to levels below 7.5 times over the next 12-18 months, or if EBITA to Interest falls below 1.2 times. In addition, any material long term use of the ABL facility to fund operating needs could result in a downgrade.

While a ratings upgrade is unlikely over the near term, upward rating consideration could be warranted if the company demonstrates steady revenue growth at improving operating margins. The company would also need to expand its operating scope to diversify its revenue base, without a material increase in debt. In particular, sustained Debt to EBITDA of less than 5.5 times, EBITA to Interest above 2.5 times, along with robust cash reserves could warrant a ratings upgrade.

The principal methodology used in this rating was the Global Manufacturing Industry published in December 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

CPG International Inc., headquartered in Scranton, Pennsylvania, is a leading manufacturer of premium, low maintenance building products for residential, commercial and industrial markets.

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 rating action on the support provider and in relation to each particular 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 rating action, and whose ratings may change as a result of this 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.

David Berge
VP - Senior Credit Officer
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

Alexandra S. Parker
MD - Corporate Finance
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 assigns a B3 CFR to CPG International Inc.; rates LBO financing
No Related Data.
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