Standard & Poor’s (S&P) Ratings Services last month upgraded its outlook on Builders FirstSource (BFS) to positive from negative and affirmed BFS’ credit ratings. But the credit-rating agency also noted that while the EBITDA (earnings before interest, taxes, depreciation, and amortization) of America’s eighth-biggest pro dealer should turn positive this year for the first time since 2007, that change still won’t be enough to fully cover BFS’ annual interest expenses.
“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. “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.
S&P said that the positive EBITDA it expects for BFS for all 2012 would mark the company’s first year in that territory since 2007. In 2013, it believes BFS’ EBITDA will grow to a postive $35 million.
“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. This 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.