Fitch Revises USG's Outlook to Stable; Affirms 'B-' IDR

CHICAGO--()--Fitch Ratings has affirmed USG Corporation's (NYSE: USG) ratings, including the company's Issuer Default Rating (IDR) at 'B-'. The Rating Outlook has been revised to Stable from Negative. A complete list of rating actions follows at the end of this release.

The ratings for USG reflect 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 revision of the Outlook to Stable reflects Fitch's expectation of improving profitability this year and in 2013, driven by a modest growth in demand and improvement in wallboard prices. Overall U.S. construction spending was strong during the first seven months of the year, advancing 9.3% compared with the same period last year. Spending was particularly robust for private commercial and residential construction, which grew 21% and 10.3%, respectively. USG's wallboard shipments have grown nearly 17% during the first half of 2012 compared with the same period last year. More importantly, significant pricing increases implemented by the company and the industry in early 2012 have so far held up.

The Stable Outlook also reflects USG's strong liquidity position. As of June 30, 2012, the company had $745 million of liquidity comprised of $405 million of cash, $74 million of short-term marketable securities, $54 million of long-term marketable securities and $212 million of availability under its revolving credit facilities. While Fitch expects the company will continue to be free cash flow (FCF) negative, Fitch anticipates USG's liquidity position will remain healthy during the next 12-18 months. Fitch currently projects USG's overall liquidity will be between $650 million and $700 million by year-end 2012 and approximately $550 million to $600 million at the end of 2013. USG has no major debt maturities until 2016, when $500 million of senior notes become due.

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.

Fitch's housing forecasts for 2012 have been raised since early spring, but still assume only a moderate rise off a very low bottom. In a slowly growing economy with relatively similar distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, single-family housing starts should improve about 12%, while new home sales increase approximately 10.5% and existing home sales grow 5.6%. Further moderate improvement is forecast for 2013.

Fitch projects home improvement spending will increase 4.5% in 2012 and grow 4% in 2013. Growth patterns in the intermediate term are likely to be below what the industry experienced during the previous housing boom and the early part of the past decade due to the slower growth in the U.S. economy and only moderately better housing market conditions.

The fundamentals of the U.S. commercial real estate (CRE) market turned positive during second-half 2011, and the improvement has continued in 2012. The increase in demand, coupled with the low levels of new commercial construction in recent years, has fueled strong new commercial construction activity so far this year. Growth in new commercial construction activity will likely moderate during the second half of 2012 due to the slower growth in the U.S. economy, lingering problems of key European economies, and continued challenges in the CRE capital markets. Fitch currently projects private nonresidential construction will expand 13.1% in 2012 and 5% in 2013.

While Fitch is currently projecting some improvement in the construction sector during 2012 and 2013, this level of activity is unlikely to result in much of an improvement in wallboard demand and industry capacity utilization rates. Fitch projects industry wallboard shipments will increase in the low- to mid-single-digit percentage range during 2012.

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 holding up. During the first quarter of 2012, USG reported a 19.5% year-over-year increase in average wallboard price. The strong growth in pricing continued during the second quarter, as USG reported an 18.4% year-over-year increase. Additionally, its average wallboard price grew $1.66 per thousand square feet, or 1.3%, sequentially from the first quarter of 2012 to the second quarter of 2012. USG's average wallboard price has gained roughly $27.68 per thousand square feet, or 26.5%, from the trough reported during the first quarter of 2008.

While the company's operating results and credit metrics remain weak, USG has reported meaningfully higher EBITDA for the latest 12 month (LTM) period ending June 30, 2012 compared with the low levels achieved during the past four years. Fitch-calculated EBITDA for the LTM period ending June 30, 2012 was $184 million compared with $65 million during 2011 and $51 million during 2010. Debt to EBITDA improved to 12.6x during the June 30, 2012 LTM period from 35.4x during 2011. Interest coverage is currently at 0.9x compared with 0.3x during 2011. Fitch expects the company's leverage will decline below 9x and its interest coverage will be above 1x during fiscal 2012. Fitch anticipates these credit metrics will improve further in 2013.

Future ratings and Outlooks will be influenced by broad economic and construction market trends, as well as company specific activity, particularly free cash flow trends and liquidity.

USG's ratings are currently constrained in the near term due to the company's heavy debt load and high leverage. However, a positive rating action may be considered if the company improves its revenue and profitability levels, leading to consistent debt to EBITDA levels at or below 7x and interest coverage above 1.5x while maintaining at least $500 million of liquidity.

On the other hand, a negative rating action may be considered if the projected improvement in the construction market does not materialize, leading to lower profitability and total liquidity falling below $300 million.

Fitch has affirmed the following ratings for USG:

--IDR at 'B-';

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

--Senior unsecured guaranteed notes at 'B+/RR2'.

In addition, Fitch has revised the following ratings for USG:

--Senior unsecured notes to 'B-/RR4' from 'CCC/RR5';

--Convertible senior unsecured notes to 'B-/RR4' from 'CCC/RR5'.

These revisions reflect a change in Fitch's estimation of USG's distressed enterprise value. Fitch believes that in the case of USG, it is likely that the company will reorganize in a default scenario as it did in 1993 and 2001 when the company filed for bankruptcy protection. Under this methodology, Fitch used a discounted mid-cycle EBITDA estimate and applied a multiple to determine the distressed enterprise value. Fitch had previously used the 'Liquidation Value Approach' in estimating the value that would be available to creditors and others in a default scenario. This approach involved discounting the book value of balance sheet assets of the company.

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, $659 million of unsecured notes are guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries.) Fitch's 'RR4' on USG's senior unsecured notes that are not guaranteed by the company's subsidiaries indicates average recovery prospects for holders of these debt issues.

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. 8, 2012);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug. 14, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686476

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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
Brian Bertsch
+1-212-908-0549
brian.bertsch@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
Brian Bertsch
+1-212-908-0549
brian.bertsch@fitchratings.com