Builders FirstSource (BFS), America's ninth-biggest pro-oriented construction supply company, announced Monday it will offer $250 million worth of senior secured notes due in 2019 that it will use in part to pay off similar notes that fall due next year and in 2016. In response, both Moody's and Standard & Poor's issued on Tuesday relatively low ratings to those notes.
Dallas-based BFS also said it is entering in an agreement that would extend its senior secured revolving credit facility as well as expand that credit line to an aggregate of $350 million from the current $150 million.
The hoped-for aggregate $250 million in senior secured notes would fall due in 2019 and would be secured by a first-priority lien on certain non-current assets and a second-priority lien on certain current assets. The senior secured revolving credit facility is secured by a first-priority lien on certain current assets and a second-priority lien on non-current assets.
Along with paying off its 2012 and 2016 notes, BFS also will use the $250 million for working capital and general corporate purposes, the company said. In February, the company announced it had swung to a net loss of $24.6 million in 2010's fourth quarter from $6.6 million net income in 2009's fourth quarter, when it was able to claim $33.2 million worth of tax benefits. Sales fell 4.3% in the quarter to $147.1 million. On a continuing operations basis, BFS swung to a $24.5 million loss in the fourth quarter from a $6.2 million profit in the final three months of 2009. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) amounted to a $12.5 million loss in the quarter, compared with income of $6.6 million during the year-earlier period.
That weak operating performance and what Moody's Investors Service regards as "insufficient" restructing initiatives led Moody's to put a Caa2 rating on BFS' corporate family rating; obligations rated Caa" represent a very high credit risk. Moody's also assigned the company a speculative grade liquidity of SGL-4, which it said denotes weak liquidity and few prospects for obtaining outside financing.
Meanwhile, Standard & Poor's Ratings Services affirmed its CCC+ corporate credit rating on BFS with a negative rating. It also assigned a CCC rating to the $250 million notes due 2019. "The recovery rating is '5', indicating our expectation of modest (10% to 30%) recovery for lenders in the event of a payment default," S&P said.
"The ratings affirmation reflects our belief that Builders FirstSource will likely continue to generate negative free cash flow over the upcoming year, given the ongoing weakness in new residential housing markets," S&P added. "While the company's liquidity position, which we currently view as adequate, is likely to somewhat improve due to the increased cash balances following the planned refinancing and the extended maturity of its revolving credit facility, it will likely continue to rely primarily on its cash balances to meet its interest and operating obligations until total housing starts improve at least 35% from 2010's level. If housing starts were to remain at its recent historically low levels, we believe the proposed refinancing would allow Builders FirstSource to fund its anticipated cash shortfall for approximately two years. The ratings also reflect what Standard & Poor's Ratings Services considers to be the company's vulnerable business profile given its significant exposure to highly cyclical new residential construction markets and its narrow end-market focus and geographic scope."
BFS ranks 10th on the most recent ProSales 100 and has since moved to No. 9 because of a merger higher up. (See updated list.) It serves builders across the Southeast, from Maryland to Florida to Texas. Historically it has focused on serving America's biggest homebuilders, but CEO Floyd Sherman said in February that focus is shifting to include remodelers and smaller builders.