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Global Credit Research - 15 Nov 2010
Approximately $1.0 billion of debt affected
New York, November 15, 2010 -- Moody's Investors Service downgraded Armstrong World Industries,
Inc.'s ("Armstrong") Corporate Family Rating to B1 from Ba2
and Probability of Default Rating to B1 from Ba3. In a related
rating action, Moody's assigned B1 rating to the company's
proposed $1.05 billion senior secured bank credit facility.
Armstrong's speculative grade liquidity is lowered to SGL-2
from SGL-1. The ratings for the company's existing
senior secured bank credit facilities will be withdrawn once repaid.
These rating actions result from Armstrong's intent to pay shareholders
a special cash dividend in the amount of approximately $800 million
funded from a combination of cash on hand and debt. The outlook
is stable. These rating actions conclude the review initiated on
November 5, 2010.
The following ratings/assessments were affected by this action:
Corporate Family Rating downgraded to B1 from Ba2;
Probability of Default Rating downgraded to B1 from Ba3; and,
$250 million Senior Secured Revolving Credit Facility due five
years from closing rated B1 (LGD3, 42%);
$250 million Senior Secured Term Loan A due five years from closing
rated B1 (LGD3, 42%); and,
$550 million Senior Secured Term Loan B due six and one half years
from closing rated B1 (LGD3, 42%);
The company's speculative grade liquidity rating is lowered to SGL-2
The downgrade of Armstrong's Corporate Family Rating to B1 from
Ba2 reflects diminished credit metrics as a result of the aggressive financial
strategy exhibited by Armor TPG Holdings LLC ("TPG"), Armstrong's
largest shareholder after the Asbestos Personal Injury Settlement Trust
("Trust"). TPG, which Moody's believes effectively
controls Armstrong, and the Trust are directing the company to pay
shareholders a special cash dividend in the amount of approximately $800
million. The company is financing this dividend with about $450
million of cash on hand and $350 million in debt. The increase
in debt will result in deterioration of key credit metrics, higher
debt service requirements, and diminished liquidity. On a
pro-forma basis for last twelve months through September 30,
2010, debt-to-EBITDA will increase to about 4.5
times from 3.2 times and free cash flow-to-debt will
contract to about 10% from 15.4%. Interest
coverage defined as EBITA-to-interest expense will also
weaken to about 1.1 times from 3.3 times on a pro forma
basis as well (all ratios adjusted per Moody's methodology).
Moody's views the pro forma financial metrics of Armstrong following the
dividend as being consistent with a B1 Corporate Family Rating.
Additionally, the contributions from the WAVE JV become more critical
to supporting higher debt service requirements, since Armstrong's
core operating margins remain weak with adjusted EBITA margin of 4.3%
for LTM 3Q10. Nevertheless, the company's strong North
American market position in providing flooring to the new residential
and commercial construction as well as to the remodeling end market positions
the company to benefit from eventual economic and construction recovery.
The change in Armstrong's speculative grade liquidity rating to
SGL-2 from SGL-1 is due primarily to the use of about $450
million of cash on hand to partially fund the company's proposed
dividend. Armstrong is reducing its cash on hand at 3Q10 on a pro
form basis to $232 million from $682.2, lessening
its financial flexibility to contend with ongoing uncertainties in its
end markets. Additionally, Armstrong's ability to generate
large amounts of free cash will be modestly diminished due to higher debt
The stable outlook incorporates Moody's view that Armstrong will
maintain credit metrics appropriate for its rating category. Availability
under the company's proposed revolving credit facility and the absence
of any near-term maturities or other liquidity constraints support
the stable outlook as well.
The B1 rating assigned to the proposed $1.05 billion senior
secured bank credit facility, the same rating as the corporate family
rating, reflects the preponderance of debt in Armstrong's
capital structure. The bank credit facility will have a first lien
on all the company's domestic assets. Proceeds from the bank
credit facility with about $450 million of cash will be used to
refinance Armstrong's existing outstanding bank debt, to disburse
the $800 million dividend, and to pay related fees and expenses
A rating upgrade appears unlikely over the intermediate term due to Armstrong's
low margins, increased debt burden, and generally weak end
market demand. However, over time, if the company proved
able to drive EBITA-to-interest coverage towards 3.0
times, and debt-to-EBITDA toward 3.5 times
(all ratios adjusted per Moody's methodology), through a mixture
of operating improvements and debt deduction a rating upgrade would be
A rating downgrade could result from evidence that Armstrong is not benefiting
from its cost reduction programs or if financial performance is negatively
impacted by an unexpected decline in the company's end markets.
EBITA-to-interest expense remaining below 1.5 times
or debt-to-EBITDA sustained above 4.5 times (all
ratios adjusted per Moody's methodology) for an extended period of time
could pressure the ratings. Future shareholder friendly activities,
or deterioration in the company's liquidity profile, or debt-financed
transactions would also stress Armstrong's ratings.
The last press release was on November 5, 2010 at which time Moody's
placed Armstrong's ratings under review for potential downgrade.
The principal methodologies used in this rating were Global Automobile
Manufacture Industry published in December 2007, Speculative Grade
Liquidity Ratings published in September 2002, and Loss Given Default
for Speculative-Grade Non-Financial Companies in the U.S.,
Canada and EMEA published in June 2009.
Armstrong World Industries, Inc., headquartered in
Lancaster, PA, is a global producer of flooring products and
ceiling systems for use primarily in the construction and renovation of
residential, commercial and institutional buildings. The
company also designs, manufactures and sells kitchen and bathroom
cabinets for the U.S. market. Revenues for the last
twelve months through September 30, 2010 totaled approximately $2.8
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service information, and confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Corporate Finance Group
Moody's Investors Service
Glenn B. Eckert
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's downgrades Armstrong's Corporate Family Rating to B1; assigns B1 rating to new bank credit facility; outlook stable
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