S&P: Rating On American Builders & Contractors Supply Affirmed At 'BB' With Stable Outlook; Debt Ratings Lowered To 'B+'
At the same time, we assigned our 'BB+' issue-level rating and '2' recovery rating to the company's proposed $1.875 billion senior secured term loan B due 2023. The '2' recovery rating indicates our expectation that lenders will receive substantial (70%-90%; upper half of the range) recovery in the event of a payment default. The ratings are subject to final documentation and issuance.
In addition, we lowered our senior unsecured issue-level ratings on both the $500 million and $350 million senior unsecured notes due 2021 and 2023, respectively, to 'B+' from 'BB' and revised our recovery ratings on the notes to '6' from '4'. The '6' recovery rating indicates our expectation for negligible (0-10%) recovery in the event of a payment default.
"The CreditWatch resolution and affirmation follow the completion of our analysis of the impact of the pending acquisition of L&W Supply and its related debt financing on ABC's overall credit profile," said S&P Global credit analyst Kimberly Garen. The company expects the acquisition to close in the fourth quarter of 2016.
The stable outlook on ABC reflects our expectation that over the next 12 months the company will continue to generate positive free cash flow and maintain strong liquidity. At the same time, we expect the company to maintain total leverage (including lease obligations) of between 4x and 5x and a FFO-to-debt ratio of between 12% and 20%, which are commensurate with an aggressive financial risk profile. We expect ABC to reduce its debt leverage to the lower end of that range over the next 12 months.
We could downgrade ABC within the next 12 months if the company's leverage remains above 4.5x following the acquisition of L&W Supply. This could occur if the U. S. housing recovery and consumer spending stall. In addition, downward pressure could occur if the company's EBITDA falls in excess of 20% below our 2017 forecast, causing its leverage to increase above 5x. This could also occur in a recessionary environment with at least a 100 bps decline in its gross margins; however, our economists only place a 20%-25% probability of a new recession occurring.
In our opinion, an upgrade is less likely over the next 12 months. However, upside momentum could occur if the increase in new home construction and repair and remodeling spending is much greater than we expected, causing the company's leverage to improve and remain below 4x and its FFO-to-debt ratio to increase above 20%, which is in line with a significant financial risk profile.