Moody's Lowers Outlook on U.S. Silica (SLCA) to Negative

Moody's Investors Service affirmed US Silica Company, Inc.'s (NYSE: SLCA) Corporate Family Rating at Ba3, its senior secured credit facility at Ba3, and its Probability of Default Rating at B1-PD. The Speculative Grade Liquidity rating was affirmed at SGL-2. The rating outlook was revised to negative from stable.

The following actions were taken:

Corporate Family Rating, affirmed at Ba3;

$510 million senior secured credit facility, affirmed at Ba3, to (LGD2) from (LGD3);

$50 million senior secured credit facility, affirmed at Ba3, to (LGD2) from (LGD3);

Probability of Default Rating, affirmed at B1-PD;

Speculative Grade Liquidity rating, affirmed at SGL-2.

The rating outlook was revised to negative from stable.

RATINGS RATIONALE

The negative rating outlook reflects our expectation that EBITDA and key credit metrics will deteriorate further through the balance of 2015 and, at a minimum, through early 2016, stemming primarily from weakness in the oil and natural gas industry. The rapid deterioration in U.S. Silica's key end markets has resulted in an 11% decline in adjusted EBITDA for trailing-twelve months ending June 30, 2015 as compared to year-end 2014. Key credit metrics have also weakened. Adjusted debt-to-EBITDA increased to 2.9x from 2.7x and adjusted EBIT to interest coverage declined to 4.3x from 6.4x for the same periods. Although the company's operating margin remains solid, it also declined to 18.0% from 21.2%. The benefit from strong third and fourth quarters in 2014 will roll off over the next two quarters. During this time, we expect that TTM EBITDA will decline further from lower year-over-year proppant prices and our expectation for reduced demand during seasonally slow quarters.

U.S. Silica's Ba3 Corporate Family Rating reflects the company's modest debt leverage, solid interest coverage, solid profit margins, good liquidity and strong market position in the frac-sand industry. The company's credit profile also benefits from its position as one of the largest producers of industrial silica in the United States, its extensive proven and probable reserves, strategically located quarries and production facilities, developed logistical network and long-standing customer relationships. At the same time, the company's rating is constrained by its limited size, reliance on a single commodity product, exposure to cyclical end markets and reliance on the hydraulic fracturing industry for the majority of its revenue and operating income.

US Silica's SGL-2 reflects the company's good liquidity position over the next 12 months. At June 30, 2015, the company's liquidity was supported by $251 million of cash and a $50 million senior secured revolving credit facility. The facility had no borrowings and $3.1 million allocated for letters of credit as of June 30, 2015, leaving $46.9 million available. The company has generated negative free cash flow over the past several years due to shareholder dividends and capital investments in raw sand plants, resin coated product facilities and transloading terminals. For the trailing twelve months ending June 30, 2015, the company generated $29 million of free cash flow, which reflects reduced capital spending in the midst of challenging market conditions. Over the near-term, we expect U.S. Silica to preserve cash by being selective in its capital investment strategy, though we still expect the company to pay a quarterly dividend. Our liquidity scenario does not account for any potential acquisitions which U.S. Silica might pursue. The company's revolving credit facility is governed by a total net leverage covenant of no more than 3.75x whenever usage of the revolving credit facility exceeds 25% of the revolver commitment, excluding certain undrawn letters of credit. We expect do not expect the company to be subject to this springing financial covenant over the next 12 months.

Moody's indicated the rating outlook could be returned to stable if the oil and natural gas end markets stabilize such that drilling activity increases (even modestly) and the company continues to generate positive free cash flow. In addition, adjusted operating margin stabilized at approximately 20%, adjusted debt-to-EBITDA sustained closer to 3.0x, and adjusted EBIT to interest expense sustained above 5.0x would also support a stable outlook.

The ratings could be downgraded if operating results deteriorate such that adjusted debt-to-EBITDA increases beyond 4.0x, most likely due to persistent weakness in the oil and natural gas end market. Should the company aggressively pursue growth through highly leveraged acquisitions, engage in shareholder friendly activity, or experience a reduction in liquidity, especially during this period of weakness in the oil and natural gas end markets, the ratings would be downgraded.

The ratings are not likely to experience upward movement in the near term. However, Moody's notes that stronger liquidity would be a prerequisite for an upgrade, with substantially stronger internal cash cushion and external long-term, committed and unconditional credit availability. The ratings could experience upward momentum if the company continues to build greater scale and diversity and consistently generates positive free cash flow, while reducing and maintaining its adjusted debt-to-book capitalization below 50% and adjusted debt-to-EBITDA closer to 2.0x.

The principal methodology used in these ratings was Building Materials Industry published in September 2014. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

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