Fitch Rates USG's Proposed $250MM Senior Notes 'B+/RR2'; Outlook Negative

NEW YORK--()--Fitch Ratings has assigned a 'B+/RR2' rating to USG Corporation's (NYSE: USG) proposed offering of $250 million principal amount of senior unsecured notes due 2020. The new issue will be guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries. The company intends to use the net proceeds from the notes issuance to fund the recently announced cash tender offer for any and all of its outstanding $300 million 9.75% senior notes due 2014 and for working capital and other general corporate purposes.

Fitch currently rates USG's Issuer Default Rating (IDR) at 'B-'. The Rating Outlook is Negative. A complete list of USG's ratings follows at the end of this release.

The rating for USG reflects the company's leading market position in all of its businesses, strong brand recognition, its large manufacturing network and sizeable gypsum reserves. Risks include the cyclicality of the company's end-markets, excess capacity currently in place in the U.S. wallboard industry, volatility of wallboard pricing and shipments and the company's high leverage.

The Negative Outlook reflects Fitch's belief that underlying demand for the company's products will remain weak through at least 2012 and the company's liquidity position is likely to deteriorate in the next 12 months. With only a moderate economic growth expectation for 2012, the environment may at best support a relatively modest recovery in housing metrics over the next 12 months. New commercial construction spending, although expected to improve relative to 2011, is projected to remain significantly below pre-recession levels.

USG currently has $834 million of liquidity comprised of $365 million of cash, $286 million of short-term and long-term marketable securities and $183 million of availability under its U.S. and Canadian revolving credit facilities. However, a weak operating environment over the next 12 months will likely result in continued losses and negative free cash flow (FCF) for the company, thereby eroding its currently solid liquidity position. Fitch currently projects USG's overall liquidity will be between $650 million and $700 million by year-end 2012. Should the depressed level of housing starts and weak new non-residential construction spending persist beyond 2012, USG's liquidity could deteriorate further and prompt negative rating actions.

USG markets its products primarily to the construction industry, with approximately 21% of the company's 2011 net sales directed toward new residential construction, 23% derived from new non-residential construction, 53% from the repair and remodel segment (commercial and residential) and 3% from other industrial products.

Certain recent economic/construction related statistics, such as job growth, consumer confidence, household formations, multifamily starts, existing home sales, pending home sales, housing inventories, and foreclosures were improving and/or above consensus. A few key statistics such as single-family housing starts, new home sales, home prices (CoreLogic, Case Shiller) were declining/short of expectations. Overall, the current setting is much like at the beginning of 2011.

Fitch's housing forecasts for 2012 assume a modest rise off a very low bottom. New-home inventories are at historically low levels and affordability is at near-record highs. In a slowly growing economy with distressed home sales competition similar to 2011, less competitive rental cost alternatives, and, possibly, even lower mortgage rates on average, single-family housing starts should improve about 5% to 450,000, while new-home sales increase approximately 5.6% to 319,000 and existing-home sales grow 3% to 4.388 million.

Fitch currently projects home improvement spending will increase 4% in 2012. The gradual improvement in the economy and moderately better housing market conditions could provide the catalyst for a slightly more robust increase in spending for remodeling projects next year.

New commercial construction is expected to be constrained again this year as fundamentals, while improving, remain weak compared to pre-recession levels. It may take several years before any meaningful growth occurs, as credit availability remains an issue and a glut of unoccupied commercial space will limit new development projects in the intermediate term. Fitch currently projects private nonresidential expenditures will grow 4% in 2012.

While Fitch is currently projecting some improvement in the construction sector during 2012, this level of activity is unlikely to result in much of an improvement in wallboard demand and industry capacity utilization rates.

Last year, major manufacturers announced that they were eliminating the practice of job quotes in 2012. In the past, job quotes provided pricing protection for customers, particularly for large projects. However, this practice also limited the effectiveness of price increases implemented by manufacturers. Most manufacturers announced that they are implementing a 30%-35% increase in wallboard prices effective in 2012.

The manufacturers' pricing increases appear to be gaining traction. USG recently reported that for the first two months of 2012, net sales improved 15.7% to $516.9 million and the company had operating profit of $5.7 million and a net loss of $30.5 million. During the comparable period in 2011, USG had net sales of $446.9 million, an operating loss of $46.8 million and a net loss of $82.3 million. The company attributes the improved year-over-year results primarily to increases in U.S. average wallboard price and wallboard gross margin.

While USG has had initial success with its price increase, it remains unclear how much of the announced 2012 increase will be fully realized and if this level of pricing can be sustained throughout the year given lackluster wallboard demand. With continued low demand levels, some producers may choose to price more aggressively in order to gain market share.

Fitch currently rates USG as follows:

--IDR 'B-';

--Secured bank credit facility 'BB-/RR1';

--Senior unsecured guaranteed notes 'B+/RR2';

--Senior unsecured notes 'CCC/RR5';

--Convertible senior unsecured notes 'CCC/RR5'.

Fitch's Recovery Rating (RR) of 'RR1' on USG's $400 million secured revolving credit facility indicates outstanding recovery prospects for holders of this debt issue. Fitch's 'RR2' on USG's unsecured guaranteed notes indicates superior recovery prospects. (Currently, $650 million of unsecured notes are guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries.) Fitch's 'RR5' on USG's senior unsecured notes that are not guaranteed by the company's subsidiaries indicates below-average recovery prospects for holders of these debt issues. Fitch applied a liquidation analysis for these RRs.

Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 12, 2011).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
Craig Fraser
Managing Director
+1-212-908-0310
or
Media Relations
Sandro Scenga
+1-212-908-0278
sandro.scenga@fitchratings.com

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
Craig Fraser
Managing Director
+1-212-908-0310
or
Media Relations
Sandro Scenga
+1-212-908-0278
sandro.scenga@fitchratings.com