S&P: Ply Gem Industries Inc. Corporate Credit Rating Raised On Improved Margins And Reduced Leverage; Other Rating Actions
We also raised our issue-level rating on Ply Gem's $430 million term loan due 2021 to 'BB' (two notches higher than the corporate credit rating) from 'B+' and revised the recovery rating to '1' from '2' on the term loan. The '1' recovery rating indicates our expectation of very high (90% to 100%) recovery in the event of a payment default.
At the same time, we raised our issue-level rating on Ply Gem's $650 million senior unsecured notes due 2022 to 'B' (one notch lower than the corporate credit rating) from 'CCC+'. We are revising the recovery rating on the notes to '5' from '6', indicating our expectation of modest (10% to 30%, upper end of the range) recovery for noteholders in the event of a payment default.
"The stable outlook reflects our view that Ply Gem will experience sales growth and margin improvement in 2016 due to pricing, mix, and positive trends in new home construction and repair and remodel activity," said S&P Global Ratings credit analyst Pablo Garces. "We expect adjusted leverage will remain at or below 4.5x over the next 12 months, with adjusted EBITDA in the $240 million to $260 million range."
We could lower the rating if Ply Gem's leverage approached 5x or if liquidity became constrained to the point we would consider less than adequate over the next 12 months. Such events could occur due to an unexpected contraction in new home construction, pricing weakness, or commodity cost spikes. We could envision a downgrade if such events eroded EBITDA margins by more than 100 basis points compared with our current assumption over the next 12 months, causing leverage to increase toward 5x. While we consider it less likely, a negative action could take place if Ply Gem or its owners took on a more aggressive financial policy, such as increasing debt leverage to 5x to fund an acquisition or to pay a dividend.
While we view an upgrade as unlikely over the next 12 months, we could raise the rating if Ply Gem's sales and EBITDA exceeded our baseline scenario, causing leverage to fall to less than 4x and if we believed its owners were committed to maintaining leverage at such levels over the next 12 months. Such events would likely need to coincide with Ply Gem's private equity's ownership being reduced to less than 40% in order for us to consider a further upgrade.