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Rating Action:

Moody's downgrades Roofing Supply Group's corporate family rating to B3; rating outlook stable

Global Credit Research - 19 Jun 2013

Approximately $515 million of debt affected

New York, June 19, 2013 -- Moody's Investors Service downgraded the corporate family rating of Roofing Supply Group, LLC ("RSG"), a national distributor of roofing products and related building materials, to B3 from B2 and its probability of default rating to B3-PD from B2-PD. These rating actions result from our view that key debt leverage metrics will remain elevated, warranting the lower rating. In a related rating action, Moody's lowered the rating of the company's senior secured term loan to B3 from B2, and its senior unsecured notes to Caa1 from B3. The rating outlook is stable.

The following rating actions were taken:

Corporate Family Rating downgraded to B3 from B2;

Probability of Default Rating downgraded to B3-PD from B2-PD;

Senior secured term loan due 2019 lowered to B3 (LGD4, 51%) from B2 (LGD4, 51%); and,

Senior unsecured notes due 2020 lowered to Caa1 (LGD5, 74%) from B3 (LGD5, 73%).

RATINGS RATIONALE

The downgrade of RSG's corporate family rating to B3 from B2 results from debt leverage credit metrics being higher than previously anticipated. Operating performance is below our expectations from when we rated RSG in May 2012, at which time Clayton, Dubilier & Rice, LLC acquired RSG. Operating margins over the past few quarters have contracted due to higher product costs, lower than anticipated volumes, and a product shift towards commercial roofing from residential roofing products. Commercial roofing products are normally lower margin items than the margins for residential roofing products. Reduced storm activity in 1Q13 relative to the year prior adversely impacted operating performance as well. Also, we anticipated permanent balance sheet debt reduction beyond minimum term loan amortization, which has not occurred nor is likely to take place in any meaningful amounts. Despite the prospect of some operating improvement, we project adjusted debt-to-EBITDA will remain elevated and is likely to exceed 6.5 times over the next 12 months. This is higher than the level previous identified as a trigger for downward ratings pressure. Debt-to-book capitalization will exceed 75%, and the company has significant amount of negative tangible net worth. Also, we believe RSG will have difficulty generating large levels of retained cash flow relative to its debt, resulting in retained cash flow-to-debt remaining below 5% over our time horizon (all ratios incorporate Moody's adjustments). These key credit metrics are characteristic of lower rated entities.

Providing some offset to its leveraged capital structure and resulting fragile cash flow metrics is our view that the roofing products sector is a source of strength within the building products industry. In most cases, projects related to roof repair or replacement, the main driver of RSG's revenues, are considered non-discretionary. Also, RSG's good liquidity profile characterized by significant availability under the company's asset-based revolver is a key credit strength. Although the $175 million revolving credit facility is used largely for seasonal working capital needs in the first half of year, we believe that revolver availability will remain high relative to the size of RSG's revenue base. RSG will use free cash flow to pay down these borrowings, especially in its fourth fiscal quarter when free cash flow generation is the strongest.

The stable rating outlook reflects our view that RSG's solid liquidity profile and lack of near-term maturities beyond term loan amortization give it the financial resources to support growth prospects for roofing material despite its leveraged capital structure.

The lowering of the RSG's senior secured term loan to B3 from B2, and its senior unsecured notes to Caa1 from B3 results from the downgrade of the company's corporate family rating.

We do not expect positive rating actions for RSG over the near term primarily due to the company's elevated debt leverage. However, if RSG were to improve operating performance and reduce debt using free cash flow such that debt-to-EBITDA falls below 4.5 times and retained cash flow-to-debt nears 10% (all ratios include Moody's adjustments), then the ratings may be considered for an upgrade.

Negative rating actions could occur if RSG's operating performance deteriorates or is below our expectations such that debt-to-EBITDA approaches 7.0 times or retained cash flow-to-debt remains below 5.0% (all ratios include Moody's adjustments). Excessive usage of the revolving credit facility, deterioration in the company's liquidity profile or dividends could pressure the ratings as well.

The principal methodology used in this rating was the Global Distribution & Supply Chain Services Industry Methodology published in November 2011. 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.

Roofing Supply Group, LLC ("RSG"), headquartered in Dallas, TX, is a national distributor of roofing products and related building materials supplying roofing contractors, home builders, and retailers. Clayton, Dubilier & Rice, LLC through its respective affiliates is the primary owner of RSG. Revenues for the 12 months through March 31, 2013 totaled about $0.9 billion.

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.

Peter Doyle
Analyst
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

Brian Oak
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 downgrades Roofing Supply Group's corporate family rating to B3; rating outlook stable
No Related Data.

 

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