Fitch Rates USG's Proposed Sr. Unsecured Notes Offering 'BB-/RR2'; Outlook
CHICAGO -- October 28, 2013
Fitch Ratings has assigned a 'BB-/RR2' rating to USG Corporation's (NYSE: USG)
proposed offering of $350 million of senior unsecured notes. USG intends to
use the net proceeds to fund a portion of the company's initial $500 million
cash investment (consisting of the net proceeds of the notes and cash on hand)
in its previously announced proposed joint venture (JV) with Boral Limited. If
USG does not complete the JV, the company intends to use the proceeds from the
notes issuance for general corporate purposes, which may include the repayment
of debt, the funding of pension obligations, working capital, capital
expenditures and potential acquisitions.
The Rating Outlook is Stable. A complete list of ratings follows at the end of
KEY RATING DRIVERS
The ratings for USG reflect the company's leading market position in all of
its core businesses, strong brand recognition, its large manufacturing network
and sizeable gypsum reserves. Risks include the cyclicality of the company's
end-markets, excess capacity currently in place in the U.S. wallboard
industry, volatility of wallboard pricing and shipments and, although
improving, the company's still high leverage position.
The Stable Outlook reflects Fitch's expectation that demand for USG's products
will continue to grow during the remainder of 2013 and into 2014 as the
housing market maintains its moderate recovery and commercial construction
activity improves from cyclical lows.
The ratings and Stable Outlook also incorporate USG's solid liquidity
USG BORAL BUILDING PRODUCTS
On Oct. 16, 2013, USG and Boral Limited announced that they have entered into
agreements to form a strategic JV, USG Boral Building Products. The 50/50 JV
will leverage the two companies' brands, complementary geographic footprints
and technological expertise. The transaction is expected to close in January
2014, subject to closing conditions, including Foreign Investment Review Board
approval and other third party consents.
The JV is valued at $1.6 billion, with Boral contributing its Gypsum division,
valued at $1.35 billion, to the JV and USG contributing assets valued at $250
million, which includes its Asian and Middle Eastern businesses, as well as
exclusive access to USG's technologies in the JV's territory. In addition, USG
will pay Boral cash payments of up to $575 million, of which $500 million will
be paid upon closing of the transaction, and, subject to achieving earnings
targets, $25 million on the third anniversary and $50 million on the fifth
The JV is targeted to be self-funding with the ability to borrow in its own
right with dividend distribution targeted at 50% of after-tax profit, taking
into consideration the growth needs of the JV. Management estimates that USG's
share of the JV income will be roughly $35 million-$45 million in 2014.
The $500 million cash contribution to the JV will be funded with proceeds from
the proposed $350 million notes issuance and $150 million of existing cash
holdings. The higher debt levels will increase USG's leverage relative to
Fitch's expectations at the time when the company's ratings were upgraded in
September 2013. USG's Fitch-calculated leverage is now expected to be around
6.5x at year-end 2013 compared with Fitch's earlier forecast of leverage
falling below 6x at the close of 2013. Fitch expects the interest coverage
ratio will settle at around 2x at the close of 2013. Nevertheless, these
credit metrics remain appropriate for the rating level.
While this transaction negatively impacts the company's credit metrics in the
short- to intermediate-term, the proposed JV has good strategic rationale for
USG and is consistent with management's goal of diversifying its earnings
stream. The strategic JV with Boral provides USG with an immediate significant
presence in high-growth emerging markets and allows the company to leverage
its leading technologies with Boral's existing production and distribution
USG has further opportunity to lower its leverage levels by calling $400
million of convertible senior unsecured notes, which would likely be converted
into equity. USG is currently evaluating if and how much of the convertible
notes it will call while still preserving its roughly $2 billion of net
operating loss carryforwards. USG's interest coverage ratio could also improve
further if the convertible notes are converted into equity, as this debt
carries a 10% coupon.
STRONG LIQUIDITY POSITION
As of Sept. 30, 2013, USG had $844 million of liquidity comprised of $452
million of cash, $100 million of short-term marketable securities, $38 million
of long-term marketable securities and $254 million of borrowing availability
under its U.S. and Canadian credit facilities. In addition, the company's
consolidated JVs in Oman have two credit facilities totaling $36 million, of
which $29 million was available to the JV for term loan borrowings. Fitch
expects USG's liquidity will remain healthy during the next 12-18 months,
projecting overall liquidity will remain above $500 million following the
expected cash contribution to the proposed JV. USG has no major debt
maturities until 2016, when $500 million of senior notes become due.
Future ratings and Outlooks will be influenced by broad economic and
construction market trends, as well as company specific activity, particularly
free cash flow trends and liquidity.
Positive rating actions may be considered if the company shows further
improvement in financial results and operating metrics, including debt to
EBITDA levels trending at or below 4x and interest coverage above 3x, while
maintaining at least $500 million of liquidity.
On the other hand, a negative rating action may be considered if the projected
improvement in the construction market dissipates, leading to revenue declines
in the 15%-20% range, EBITDA margins in the low- to mid-single-digit range and
total liquidity falling below $300 million.
Fitch currently rates USG as follows:
--Long-term IDR 'B';
--Secured bank credit facility 'BB/RR1';
--Senior unsecured guaranteed notes 'BB-/RR2';
--Senior unsecured notes 'B/RR4';
--Convertible senior unsecured notes 'B/RR4'.
Fitch's Recovery Rating (RR) of 'RR1' on USG's $400 million secured revolving
credit facility indicates outstanding recovery prospects for holders of this
debt issue. Fitch's 'RR2' on USG's unsecured guaranteed notes indicates
superior recovery prospects. (Assuming the company completes the proposed $350
million notes issuance, $1 billion of unsecured notes will be guaranteed on a
senior unsecured basis by certain of USG's domestic subsidiaries.) Fitch's
'RR4' on USG's senior unsecured notes that are not guaranteed by the company's
subsidiaries indicates average recovery prospects for holders of these debt
issues. Fitch applied a going concern valuation analysis for these RRs.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Robert Rulla, CPA, +1 312-606-2311
Fitch Ratings, Inc.
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