S&P lowers its corporate credit, senior secured debt ratings on NCI Building Systems to B from B+, citing 'still-declining' nonresidential construction activity
December 21, 2010
– Standard & Poor's Ratings Services said today that it lowered its corporate credit and senior secured debt ratings on NCI Building Systems Inc. to 'B' from 'B+'. The recovery rating on the senior secured bank credit facilities remains '3', indicating our expectation that lenders can expect meaningful (50% to 70%) recovery in the event of a payment default. All ratings on NCI remain on CreditWatch with negative implications, where they were placed on Oct. 26, 2010, meaning the rating could be lowered further or affirmed following the completion of our review.
"The downgrade and continued CreditWatch listing reflects our view that demand for metal buildings will continue to be weak through 2011 as a result of still-declining nonresidential construction activity," said Standard & Poor's credit analyst Thomas Nadramia. We expect that weak levels of demand will result in intense price competition among producers, which will likely result in challenged operating performance over the next several quarters for NCI. Standard & Poor's expects commercial construction to decline by about 15% in 2010 and another 7% in 2011 before stabilizing toward the end of next year.
As a result, we believe NCI's operating earnings and EBITDA may be weaker than our previous expectations, resulting in credit measures that may no longer be in-line with the new rating. NCI maintains what we consider to be strong liquidity at this time under our criteria, with more than $77 million of cash on hand and about $80 million of availability (as of Oct. 31, 2010) under its $125 million asset-based revolving credit facility due April 2014. Also, the company is not subject to financial ratio covenants under its bank credit facilities until the first quarter of fiscal year 2012.
In resolving the CreditWatch listing, Standard & Poor's expects to meet with NCI's management to discuss its near-term operating and financial strategies given the current challenging market environment. If a downgrade were the outcome of our analysis, we think it would likely be limited to one notch given our view of the company's strong liquidity position.