Standard & Poor's revises outlook on LP to positive from stable on strong demand, favorable prices and affirms BB ratings

Audrey Dixon

NEW YORK , August 22, 2013 (press release) –

U.S.-based building products company Louisiana-Pacific Corp. is benefiting from increased demand as the housing market continues to recover and from higher prices for certain products because competitive supply remains in check.
The company meaningfully exceeded our EBITDA expectations in 2012 and is tracking ahead of our 2013 forecast through the first six months of the year.
We are revising our rating outlook on the company to positive from stable to reflect the potential for an upgrade if recent favorable volume and price trends hold such that it is likely for leverage to drop closer to 2x EBITDA.
We are affirming the 'BB' corporate credit rating and the 'BB' issue-level rating on the company's unsecured notes.

Standard & Poor's Ratings Services said today it revised its outlook on Louisiana-Pacific Corp. to positive from stable. At the same time, we affirmed all existing ratings, including our 'BB' corporate credit rating on the company. The '3' recovery rating indicates our expectation for meaningful (50%-70%) recovery in the event of a default.

We revised the outlook to positive because Louisiana-Pacific was tracking ahead of our 2013 EBITDA forecast through the first six months of the year. This outperformance reflects an improvement in sales volumes, which was expected given the accelerating housing recovery, plus higher-than-expected sales prices, as competitive supply remains in check.

"The positive outlook acknowledges stronger demand for many of Louisiana-Pacific's products as the housing market continues to recover, as well as favorable prices, particularly for OSB, as supply remains in check. If these trends continue, leverage would drop to about 2x EBITDA, which would warrant a one-notch upgrade. This scenario also assumes that acquisition activity and expansion capital expenditures remain manageable," said Standard & Poor's credit analyst James Fielding.

A downgrade is unlikely over the next 12 months given our economists' forecast for double-digit growth in new housing starts, which is the primary driver of demand for Louisiana-Pacific's products. However, we would revise our outlook back to stable if the housing recovery stalled, perhaps because of another recession in the U.S. We assess the risk of another recession in the next year at 15% to 20%. We would also revise our outlook back to stable if the company pursued aggressive expansion initiatives and funded those investments with debt such that leverage would stay closer to 3x EBITDA. We ascribe a low probability to this scenario over the next 12 months.

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