Research: Rating Action: Moody’s Downgrades Cornerstone’s CFR from B2 to B2, Assigns B2 to New Senior Secured Debt; stable outlook

About $4.2 billion in rated debt affected

New York, July 12, 2022 — Moody’s Investors Service (Moody’s) has downgraded the Corporate Family Rating (CFR) of Cornerstone Building Brands, Inc. (Cornerstone) to B2 from B1 and the Probability of Default (PDR) rating ) to B2-PD from B1-PD. Moody’s also downgraded the rating of Cornerstone’s existing senior secured credit facility to B2 from B1 and the rating of the company’s senior unsecured notes to Caa1 from B3. At the same time, Moody’s has assigned a B2 rating to Cornerstone’s new senior secured debt due 2028. The outlook is stable. Finally, Moody’s withdrew the company’s SGL-1 speculative liquidity rating.

The ratings downgrades reflect Cornerstone’s increased debt leverage following the company’s privatization transaction announced on March 7, 2022. Pro forma for the leveraged buyout transaction and proposed financing, Moody’s expects the debt to total EBITDA ratio to be 5.7x at the end of 2022 (including Moody’s adjustments) compared to 4.4x the total debt to EBITDA ratio at the end of 2021. The proceeds of the proposed new senior secured debt of $1,010 million, the issuance of $464 million of PIK notes to the holding company, the $195 million raised in preferred shares and available cash will be used to finance the transaction . The governance risk we consider in rating Cornerstone is its private company status by Clayton Dubilier and Rice (CD&R), a private equity firm with a history of leveraged acquisitions and dividend distributions.

The B2 rating assigned to the new senior secured debt, the liquidity facility and the term loans, which comply with B2 CFR, results from their senior position on the senior unsecured notes and the PIK notes of $464 million, as well as on the pledge guaranteeing the guaranteed debt.

“While we expect Cornerstone’s management team to remain focused on execution and deleveraging from free cash flow, we believe increased leverage will limit flexibility. of the company at a time of heightened operational and financial risks,” said Emile El Nems, Vice President. – Senior Credit Officer at Moody’s.

Downgrades:

..Issuer: Cornerstone Building Brands, Inc.

…. Business family ranking, downgraded from B1 to B2

…. Default scoring probability, downgraded to B2-PD from B1-PD

….Senior secured bank credit facility, downgraded from B1 (LGD3) to B2 (LGD3)

….Senior regular unsecured bond/debenture, downgraded to Caa1 (LGD6) from B3 (LGD5)

Duties:

..Issuer: Cornerstone Building Brands, Inc.

….Senior secured bank credit facility, assigned B2 (LGD3)

….Senior secured bond/debenture attributed B2 (LGD3)

Withdrawals:

..Issuer: Cornerstone Building Brands, Inc.

…. Speculative liquidity rating, withdrawn, previously rated SGL-1

Outlook Actions:

..Issuer: Cornerstone Building Brands, Inc.

…. Outlook, changed to stable from rating under review

RATINGS RATIONALE

Cornerstone’s B2 CFR reflects the company’s high leverage and exposure to cyclical end markets. At the same time, the rating takes into account (i) the company’s leadership position as the largest integrated manufacturer of exterior building products in North America for the commercial, residential and repair construction industries and renovation, (ii) improved profitability and (iii) predictability of free cash flow generation. The rating is also supported by the company’s good liquidity.

Moody’s expects Cornerstone to have good liquidity over the next 12 to 18 months. This is backed by (i) $303 million in cash, (ii) $850 million in availability under the company’s $850 million asset-based loan (ABL) revolver expiring in July 2027, (iii) $95 million availability under the Company’s $95 million ABL FILO credit facility expiring in July 2027, (iv) full availability under the company’s $115 million revolving credit facility of the company expiring in April 2026, (v) and Moody’s expectations for strong free cash flow generation. The ABL facilities ($850 million ABL facility and $95 million FILO facility) have a spring-loaded fixed charge commitment ratio of 1:1 that is triggered when availability under the ABLs, in aggregate, is less than 10% of total commitments or borrowing base, as the case may be. is lower. Similarly, the company’s liquidity facility has an elastic net leverage ratio of 7.75x that triggers when utilization exceeds 35% of the facility. There are no financial covenants under the term loan facility.

The stable outlook reflects Moody’s expectation that Cornerstone will steadily grow revenue organically, improve profitability and generate significant free cash flow that can be used to deleverage its balance sheet.

The proposed $1,010 million senior secured debt is expected to contain commitment flexibility similar to the existing $2,574 million senior secured term loan facility, including the ability to incur additional indebtedness. In addition, designations of unrestricted subsidiaries and the transfer of assets to unrestricted subsidiaries are permitted.

FACTORS THAT MAY LEAD TO IMPROVEMENT OR DEGRADATION OF RATINGS

Ratings could be upgraded if: the total debt to EBITDA ratio approaches 4.75x, the adjusted EBITA to interest expense ratio is above 3.5x, the company improves its free cash flow and good liquidity, and the company demonstrates a Commitment to modest leverage.

Ratings could be downgraded if: the total debt/EBITDA ratio is above 5.75x, the adjusted EBITA/interest expense ratio is below 2.5x, and the operating performance and liquidity of the business deteriorate.

The main methodology used in the ratings was Manufacturing published in September 2021 and available at https://ratings.moodys.com/api/rmc-documents/74970. Otherwise, please see the Scoring Methodologies page on https://ratings.moodys.com for a copy of this methodology.

Based in Cary, North Carolina, Cornerstone Building Brands, Inc. is the largest manufacturer of exterior building products for low-rise residential and non-residential buildings in North America. Following privatization, Cornerstone will become a private company of Clayton, Dubilier and Rice. As of May 28, 2022, Cornerstone’s trailing twelve months revenue was $6.0 billion.

REGULATORY INFORMATION

For details on key rating assumptions and Moody’s sensitivity analysis, see the Methodological Assumptions and Sensitivity to Assumptions sections in the Disclosure Form. Moody’s rating symbols and definitions can be found at https://ratings.moodys.com/rating-definitions.

For ratings issued on a program, series, category/class of debt or security, this announcement provides certain regulatory information regarding each rating of a subsequently issued bond or note of the same series, category/class of debt, security or under a program for which ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a media provider, this announcement provides certain regulatory information relating to the credit rating action on the media provider and each particular credit rating action for securities whose credit ratings are derived from the support provider’s credit rating. For the provisional ratings, this press release provides certain regulatory information relating to the provisional rating assigned, and to a final rating that may be assigned after the final issuance of the debt, in each case where the structure and conditions of the transaction n have not changed prior to the final rating being assigned in a way that would have affected the rating. For more information, please see the issuer/transaction page of the respective issuer at https://ratings.moodys.com.

For all relevant securities or rated entities receiving direct credit support from the lead entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action , the associated regulatory information will be that of the guarantor entity. Exceptions to this approach exist for the following information, if applicable to the jurisdiction: Ancillary services, Information to be provided to the rated entity, Information to be provided by the rated entity.

The ratings have been communicated to the rated entity or its designated agent(s) and issued without modification resulting from such communication.

These notes are solicited. Please refer to Moody’s Policy for the Designation and Assignment of Unsolicited Credit Ratings available on its website. https://ratings.moodys.com.

The regulatory information contained in this press release applies to the credit rating and, if applicable, the outlook or rating revision relating thereto.

Moody’s general principles for assessing environmental, social and governance (ESG) risks in our credit analysis are available at https://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the announced credit rating metric(s) described above.

The worldwide credit rating on this credit rating announcement was issued by one of Moody’s affiliates outside the EU and is approved by Moody’s Deutschland GmbH, An der Welle 5, Frankfurt am Main. -le-Main 60322, Germany, in accordance with Article 4(3) of Regulation (EC) No 1060/2009 on credit rating agencies. Further information on the EU approval status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

The worldwide credit rating on this credit rating announcement has been issued by one of Moody’s affiliates outside the UK and is approved by Moody’s Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the United Kingdom. . Further information on the UK endorsement status and the Moody’s office that issued the credit rating can be found at https://ratings.moodys.com.

Please see https://ratings.moodys.com for any updates on changes to the lead rating analyst and Moody’s legal entity that issued the rating.

Please see the issuer/transaction page at https://ratings.moodys.com for additional regulatory information for each credit rating.

Emile El Nems
VP – Senior Credit Officer
Corporate Finance Group
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Gretchen French
Associate General Manager
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

Release Office:
Moody’s Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
UNITED STATES
JOURNALISTS: 1 212 553 0376
Customer service: 1 212 553 1653

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