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Rating Action:

Moody's assigns new ratings for Patrick Industries (B1 CFR); outlook stable

09 Sep 2019

Approximately $300 million of new rated debt assigned

New York, September 09, 2019 -- Moody's Investors Service ("Moody's") assigned a B1 Corporate Family Rating (CFR) and a B1-PD Probability of Default Rating to Patrick Industries, Inc. (NASDAQ: PATK or "Patrick Industries"). Concurrently, Moody's assigned a B3 rating to the company's proposed $300 million senior unsecured notes due 2027 and a Speculative Grade Liquidity rating of SGL-2. Proceeds from the notes and a new first lien credit facility consisting of a $550 million revolver and $100 million term loan (both unrated by Moody's) will be used to refinance existing debt and cover fees and expenses. The outlook is stable. This is the first time that Moody's has rated Patrick Industries.

"We view Patrick Industries' acquisition growth strategy as aggressive given the size and pace of activity over the past two years. Nonetheless, the company has good credit metrics with debt-to-EBITDA leverage expected to remain near 3.0 times with good liquidity provisions that somewhat mitigate exposure to the highly cyclical and discretionary RV and marine segments," said Andrew MacDonald, Moody's Analyst for the company. "Additionally, the company has outperformed large OEMs despite the recent pull back in inventory levels at RV dealers and we expect weakness in wholesale shipments to subside by year end. Nonetheless, signs of weakening retail demand would point to a longer term decline and could pressure the rating."

Assignments:

..Issuer: Patrick Industries, Inc.

.... Corporate Family Rating, Assigned B1

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

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

....Senior Unsecured Regular Bond/Debenture, Assigned B3 (LGD5)

Outlook Actions:

..Issuer: Patrick Industries, Inc.

....Outlook, Assigned Stable

RATINGS RATIONALE

Patrick Industries' B1 CFR is supported by its large operating size and scale in the recreational vehicle (RV), marine, manufactured housing (MH), and industrial markets with revenues of $2.3 billion for the twelve months ended June 30, 2019. Pro forma for the transaction, the company has robust credit metrics compared to similarly rated companies with Moody's adjusted debt-to-EBITDA and EBITA-to-interest approximating 2.7 times and 3.2 times at close, respectively. Moody's expects debt-to-EBITDA to increase towards 3.0 times during the next 12 months stemming from acquisitions expected to be funded mainly by revolver borrowings and additional RV market softness. Nonetheless, Moody's expects leverage to decline longer term as the company manages to its target debt-to-EBITDA range of 2.0 -- 2.5 times (based on the company's calculation). The financial policy is mixed with a reasonably conservative leverage target partially mitigated by share repurchases and debt-funded acquisitions that contribute to initial company-calculated leverage of approximately 2.5 times that is above the target range. Earnings growth and debt repayment that could be accelerated if the company slows its pace of acquisitions would be the primary driver of lower leverage. The rating also benefits from the company's relatively high margins, good liquidity underpinned by strong cash flow from operations and low capital spending requirements, a broad product portfolio, and a successful track record of integrating acquisitions.

Constraining the ratings are the company's highly cyclical end markets that are susceptible to broad economic downturns as they rely heavily on discretionary spending and face high substitution risk from other leisure activities and products. The company's revenues are highly concentrated in the RV industry (56% of 2Q19 LTM sales) and are skewed towards OEMs with 46% of 2Q19 LTM revenues from three OEM customers. The industry in which the company operates also features low barriers to entry and is highly competitive. The company must also contend with volatility in labor and material cost inflation that are affected by tariffs, labor shortages, and other macroeconomic conditions. Beginning in mid-2018, the RV segment began to show signs of softening as dealers reduced inventory levels resulting in meaningful wholesale shipment declines. Moody's expects this will persist through at least the remainder of 2019 or until dealers can assess inventory needs for the next peak retail season in 2020 (generally March to September).

The stable outlook is based on Moody's expectation that the company's core segment demand will be at least stable in 2020 if not improve and that the company's financial leverage will periodically increase for debt-funded acquisitions, but will not meaningfully deviate from current levels. Moody's expects that the company will generate solid free cash flow and maintain at least good liquidity.

Patrick Industries' ratings could be upgraded if the company is expected to maintain debt-to-EBITDA below 2.5 times in combination with a more diversified product portfolio that is less susceptible to cyclical downturns. An upgrade would also require an expectation the company would maintain good liquidity with a prudent capital structure and financial policy that supports the aforementioned leverage level.

The ratings could be pressured downward if debt-to-EBITDA leverage were expected to increase and remain above 3.5 times, free cash flow-to-debt is less than 10%, or if liquidity were to weaken. An expectation that end-market demand is weakening due to macroeconomic headwinds, market share losses, or a more aggressive financial policy could also result in a downgrade.

The principal methodology used in these ratings was Global Manufacturing Companies published in June 2017. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Patrick Industries, Inc., (NASDAQ: PATK) headquartered in Elkhart, Indiana is a leading manufacturer and distributor of components parts in the RV, marine, manufactured housing and adjacent industrial markets primarily serving large OEMs. Revenues for the twelve months ended June 30, 2019 totaled $2.3 billion.

REGULATORY DISCLOSURES

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.

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.

Andrew MacDonald
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

John E. Puchalla, CFA
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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