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Rating Action:

Moody's lowers Ply Gem's unsecured notes; affirms all other ratings and positive outlook

Global Credit Research - 17 Jan 2014

Approximately $930 million of rated debt securities affected

New York, January 17, 2014 -- Moody's Investors Service lowered Ply Gem Industries, Inc.'s ("Ply-Gem") proposed $500 million senior unsecured notes to Caa2 from Caa1 due to changes in the proposed capital structure. Concurrently, Moody's affirmed all other ratings including B3 Corporate Family Rating, B3-PD Probability of Default Rating and B2 rating on the proposed $430 million term loan. Also, Moody's affirmed the Speculative-Grade Liquidity ("SGL") Assessment at SGL-2 and maintained a positive rating outlook.

Proceeds from the proposed $430 million term loan due 2021 and $500 million unsecured notes due 2022 along with cash on hand are expected to be applied towards refinancing Ply Gem's existing debt securities including its $756 million 8.25% senior secured notes due 2018 and $96 million 9.375% senior unsecured notes due 2017. Despite higher initial debt leverage, the transaction is credit positive as the company will lower its cost of capital while pushing out its maturity schedule. Because of lower cost of capital, the interest expense is estimated to decline by around 30% to $50 million from previous $71 million.

The change in the unsecured notes rating to Caa2 from Caa1 results from the company changing the allocation by $50 million between the term loan and the unsecured notes. The unsecured notes are expected to decline to $500 million and the term loan to increase to $430 million. This $50 million allocation change will save Ply Gem $1.3 million in annual cash interest expense.

The following rating actions were taken (LGD point estimates are subject to change and all ratings are subject to the execution of the transaction as currently proposed and Moody's review of final documentation):

Corporate Family Rating, affirmed at B3;

Probability of Default Rating, affirmed at B3-PD;

$430 million senior secured term loan due 2021, affirmed at B2; LGD rate changed to LGD3, 36% from LGD3, 33%;

$500 million senior unsecured notes due 2022, downgraded to Caa2 (LGD5, 80%) from Caa1 (LGD5, 78%);

Speculative-Grade Liquidity Assessment, affirmed at SGL-2;

Rating outlook remains positive.

If the transaction closes as currently proposed, Moody's will withdraw the ratings on the company's existing senior secured notes due 2018 and senior unsecured notes due 2017.

RATINGS RATIONALE

Ply Gem's B3 Corporate Family Rating reflects its high adjusted debt leverage that pro forma for this transaction is expected to increase to 7.4x from 6.9x at 9/28/2013. Moreover, the ratings reflect the company's aggressive balance sheet management and acquisitive nature. Ply Gem's customer concentration is of concern as well because top 10 customers represent 46% of total revenues. At the same time, Ply Gem's B3 Corporate Family Rating reflects the expected improvement in the company's credit metrics over the next two years as the company continues to benefit from the robust growth in its end markets (repair and remodeling and new home construction) and lower cost of capital. Adjusted debt leverage is anticipated to decline to around 5x and adjusted EBITA to interest expense to increase to about 2.4x by the end of 2015 absent any debt financed acquisitions and/or shareholder friendly activities. ABL facility availability and the lack of near-term debt maturities provide some offset to the company's high debt leverage metrics. The company's strong market position in both of its end markets - "siding, fencing, and stone" and "windows and doors" - benefits the rating.

The SGL-2 rating reflects Moody's expectation that the company's liquidity profile will remain good over the next 12 months. The SGL rating takes into consideration internal liquidity, external liquidity, covenant compliance and alternate sources of liquidity. By the end of 2014, Ply-Gem's free cash flow is expected to be positive. Additionally, Moody's projects the company to have no advances outstanding under its $250 million ABL facility due 2018.

The positive rating outlook reflects Moody's expectation for an improvement in Ply Gem's credit metrics as the company's end markets continue to expand.

The ratings could be upgraded if debt to EBITDA declines below 5.5 times and/or EBITA to interest expense is sustained above 2.0 times (all ratios incorporate Moody's standard adjustments). In addition, the ratings would benefit from consistent positive cash flow generation.

The outlook could reverse back to stable if the company is unable to reduce its debt leverage below 6x by the end of 2015. Additionally, deteriorating liquidity profile and/or interest coverage as measured by EBITA to interest expense below 1x could result in a downgrade. Further, if debt/EBITDA is sustained above 7x then ratings could be downgraded.

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.

Ply Gem Industries, Inc. is a leading manufacturer of exterior building products in North America. The company's core products are vinyl siding, windows, patio doors, and stone veneer, serving both the new construction and repair and remodeling end markets. Ply Gem is a public company and trades on NYSE under the symbol PGEM. CI Capital Partners LLC ("CI Capital") purchased the company in 2004 and together with management have a majority ownership. Revenues for the 12 months ended September 28, 2013 totaled about $1.3 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.

Tiina Siilaberg
Asst Vice President - 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

Glenn B Eckert
Associate Managing Director
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 lowers Ply Gem's unsecured notes; affirms all other ratings and positive outlook
No Related Data.

 

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