Standard & Poor's (S&P) Ratings Services upgraded on Tuesday its outlook on Builders FirstSource (BFS) to positive from negative and affirmed its credit ratings, but noted that while the EBITDA of America's ninth-biggest pro deal should turn positive this year for the first time since 2007, that change still won't be enough to fully cover interest expenses.
"In our view, improved profitability will better position the company to refinance some of its expensive floating rate debt and possibly close its interest coverage shortfall over the next 12 months," S&P said in an announcement broadcast by Reuters. "Our rating continues to reflect our assessment of the company's business risk as 'vulnerable' and its financial risk as 'highly leverage.' Our vulnerable business risk opinion acknowledges that demand for the company's products is highly cyclical and is only beginning to recover from very weak levels. Our highly leveraged financial risk assessment reflects a very heavy debt burden with high interest costs."
Aside from the change in its ratings outlook to positive from negative, S&P affirmed its CCC corporate credit rating on the company and its CC rating for $140 million of second-lien notes that the company has issued and that are due for repayment in 2016.
Dallas-based BFS reported April 19 a first-quarter net loss of $19.2 million--roughly $2 million better than its loss in the year-earlier period--on a 35% rise in sales to $219.4 million. BFS ranked ninth on the 2011 ProSales 100, with gross sales in 2010 of $700 million, all of it to pros. (A new ProSales 100 will be released next month.)
BFS' earnings announcements typically don't report EBITDA, which stands for earnings before interest, taxes, depreciation and amortization; it's a popular measure of a company's cash flow. Instead, BFS reported what it called its adjusted EBITDA, which its defines as GAAP net income (or loss) before depreciation and amortization, interest expense, income taxes, (gain) loss on sale of assets, (income) loss from discontinued operations, and other non-cash or special items including asset impairments, facility closure costs, severance, recapitalization costs, expensed acquisition costs, and stock compensation expense. By that measure, its adjusted EBITDA improved by more than $9 million but still was a negative $2.1 million.
S&P said it expects BFS' actual EBITDA to go slightly positive for all of 2012, marking its first time in that territory since 2007, and then add $35 million in 2013.
"Despite this meaningful improvement, leverage would remain high (near 10x when adjusted for operating leases) and EBITDA would not fully cover interest expense," S&P said. The comes even though it forecasts BFS will post revenues in 2013 of more than $1.2 billion, gross margins of about 22%, and no change in its $300 million worth of debt.
"Under our baseline scenario for 2012, we expect Builders FirstSource to post a $60 million to $70 million in operating cash flow deficit after working capital and other cash outflows, but to end the year with a cushion of at least $40 million above the $35 (million) minimum cash threshold," S&P said.
In December, BFS announced the completion of a new $160 million first-lien term loan financing agreement with affiliates of Highbridge Principal Strategies that's $10 million bigger than the one it replaced. At the same time, BFS entered into a stand-alone letter of credit (LOC) facility, worth $20 million, with SunTrust Bank. That's the same size as its previous LOC facility.
The term loan was issued at 97% and is secured by a first lien on almost all of BFS' assets. It is guaranteed by all of the company's subsidiaries. The interest rate to be paid is 9.5% plus the 3-month LIBOR (London Interbank Offered Rate) or 2%, whichever is higher. The loan also includes detachable warrants that allow for Highbridge Principal to purchase 1.6 million shares of BFS common stock.
"The positive rating outlook reflects our expectation that operating improvements will accelerate in line with our forecast for higher housing starts and that Builders FirstSource will likely be in a better position next year to finance some of its expensive floating-rate debt and possibly close its interest coverage shortfall," S&P said.