S&P assigns Oregon-based window and door producer Jeld-Wen a B credit rating, B- issue-level rating to US$460M senior secured notes due 2017
October 6, 2011
The company partially refinanced its existing debts with the notes proceeds. In conjunction with this transaction, private equity firm Onex Corp. invested $700 million in convertible preferred stock and $189 million in an 18-month bridge loan (also convertible into preferred convertible stock if not repaid before maturity) to complete the refinancing of existing debt of approximately $1.2 billion. (For a complete discussion of our recovery analysis, please see the recovery report on JELD-WEN to be published on RatingsDirect following the release of this report.)
"The 'B' rating on JELD-WEN reflects what we consider to be the company's highly leveraged financial risk profile, resulting from its high debt and relatively modest free cash flow generation," said Standard & Poor's credit analyst Thomas Nadramia. We expect total pro forma adjusted debt (including $700 million preferred convertible stock) will be in excess of 10x EBITDA.
"The ratings also reflect what we consider to be the company's weak business risk profile because JELD-WEN is highly dependent on the currently depressed residential construction and remodeling end markets, has thin operating profit margins, and operates in highly competitive markets," added Mr. Nadramia. Still, the company maintains a leading position in residential doors in North America, Europe, and Australia, and possesses good geographic diversity, with more than 50% of revenues and profits from outside of the U.S.
The rating and outlook incorporates our expectation that demand for JELD-WEN's window and door products, which the company sells primarily to residential end markets and account for approximately 90% of sales, will continue to face difficulties over the next several quarters as housing and remodeling markets remain near cyclically low levels. We believe repair and replacement markets, which constitute about 47% of JELD-WEN's sales, will be flat for the remainder of 2011. Weak housing markets in both the U.S. and Europe will likely continue to affect new residential construction, which accounts for 41% of JELD-WEN's worldwide sales. In the U.S., Standard & Poor's economists expect approximately 590,000 total housing starts for 2011, roughly the same as 2010 and still well below historical averages. The weakness in U.S. markets will be partially offset by better market conditions in Canada, Europe, and Australia, where JELD-WEN derives over 50% of its revenues. We expect sales of the company's products related to commercial end markets in Europe, which represent about 12% of recent sales, to remain flat for the remainder of 2011 and into 2012.
The stable rating outlook reflects our expectation that JELD-WEN's operating performance during the next several quarters will likely be flat to showing modest improvement, primarily thanks to internal cost saving measures, as we expect market conditions to remain weak. As a result, we expect credit measures to remain in line with the ratings given the company's weak business risk profile. We expect adjusted leverage to be about 10x over the next year based on adjusted EBITDA of about $150 million and cash interest coverage of about 2x. The stable rating outlook also reflects our expectation that liquidity will be adequate to meet all of the company's obligations over the next year, given the expected $50 million in cash as well as nearly full availability under the new $300 million revolving credit facility.
We could take a negative rating action if sales and adjusted EBITDA were to fall below our projected level of about $150 million in 2011 and 2012, which could result from a double-dip recession and reduced construction activity, or if the company fails to achieve benefits derived from its ongoing restructuring efforts.
For a lower rating, EBITDA would have to decline about 25% from projected levels for interest coverage to fall below 1.5x. Downward rating pressure could also occur if a decline in EBITDA caused the company to use cash to fund operating losses, resulting in a drop in liquidity materially below the projected $350 million of combined cash on hand and revolver availability.
A positive rating action, although unlikely in the near term, could occur if a greater-than-expected recovery in residential and commercial construction were to result in leverage to fall below 7x. For this to occur we project EBITDA would have to improve to $250 million or higher.