OREANDA-NEWS. S&P Global Ratings said today it affirmed its 'BB-' corporate credit rating on Beacon Roofing Supply Inc. and revised the rating outlook to positive from stable.

At the same time, we affirmed our 'BB+' issue-level rating (two notches higher than the corporate credit rating) on the company's $450 million term loan due 2022 and our 'B+' issue-level rating (one notch lower than the corporate credit rating) on the company's $300 million senior unsecured notes due 2023.

The recovery rating on the term loan is '1', indicating our expectation of very high (90% to 100%) recovery for lenders in the event of a payment default. The recovery rating on the senior unsecured notes is '5', indicating our expectation of modest (10% to 30%, higher end of the range) recovery for lenders in the event of a payment default.

"The positive outlook on Beacon Roofing Supply reflects our expectation that the company is likely to improve credit measures to a point in line with a satisfactory financial risk profile, with a debt-to-EBITDA ratio of between 3x and 4x and FFO to debt of 14% to 20% over the next 12 to 24 months," said S&P Global Ratings credit analyst Pablo Garces. "The outlook further reflects our belief that Beacon will maintain strong liquidity over the next 12 months."

We could raise our corporate credit rating on Beacon over the next 12 months if repair and remodeling spending continues to grow in the mid-single digit area, causing EBITDA and leverage to improve, with the latter remaining in the mid-3x area. Combined with an increase in FFO to debt of more than 20%, this could cause us to reassess Beacon's financial risk profile as significant. The same leverage measures could result from continued identification and realization of synergies related to Beacon's acquisition of Roofing Supply Group.

A downgrade is less likely in the next 12 months, given our favorable outlook for home construction and reroofing spending. However, we could take such an action if the U. S. housing recovery stalls or the company experiences difficulties in integrating its acquisition(s), increasing operational costs, and EBITDA falls in excess of more than 30% below our 2016 forecast, causing leverage to increase above 5x. This could also occur in a recessionary environment with a decline of at least 160 basis points in gross margins. Our economists place a 20% to 25% probability on a new recession.