Moody's Assigns 'B2' CFR to PGT, Inc. (PGTI); Notes Limited Market Positioning

Moody's Investors Service assigned PGT, Inc. (Nasdaq: PGTI) a B2 Corporate Family Rating, B3-PD Probability of Default Rating, and B2 ratings to the company's proposed $200 million senior secured term loan and $35 million senior secured revolving credit facility (together "$235 million senior secured credit facility"). Concurrently, Moody's assigned a Speculative-Grade Liquidity ("SGL") rating of SGL-2 to PGT. The rating outlook is stable.

The proceeds from the $235 million senior secured credit facility are used to execute the acquisition of CGI, a manufacturer of impact-resistant windows and doors in the Florida's southeast markets and refinance existing debt.

The following ratings were assigned (the ratings are based on the transaction as currently proposed and are subject to change upon Moody's review of final documentation):

Corporate Family Rating, assigned B2;

Probability of Default Rating, assigned B3-PD;

$35 million Senior Secured Revolving Credit Facility due 2019, assigned B2 (LGD3);

$200 million Senior Secured Term Loan due 2021, assigned B2 (LGD3);

Speculative-Grade Liquidity Rating, assigned SGL-2;

Rating outlook is stable.

RATING RATIONALE

The B2 Corporate Family Rating considers the company's concentration mostly in Florida with largely one product line and the demand primarily coming from homes set at coastal and body of water areas. The limited market positioning will hold back revenue growth as PGT's expansion is largely dependent on Florida's housing market. The company could increase its revenues by entering Florida's non-impact window inland markets where the national competitors roam. However, it will be difficult for PGT to compete at a national level and at a low price point given its size and Moody's view that it has not yet achieved economies of scale. All of its windows and doors are currently made to order thus producing large quantity of products efficiently would require an entire revamp of the company's manufacturing processes. Moody's expects the company to continue to focus on impact-resistant windows as evidenced by the proposed acquisition of CGI. Furthermore, Moody's expects a fair amount of acquisition activity going forward as the company expands its footprint.

At the same time, the B2 Corporate Family Rating considers the company's relatively strong credit metrics including debt leverage of just below 4x and expectation that PGT will de-lever as the company has historically demonstrated. In addition, the company's industry leading margins are projected to convert to a high funds from operations generation that easily covers its working capital and CAPEX. Moreover, PGT's relationships with local governments to develop building codes give the company a first mover advantage in the impact-resistant window & door market.

The B3-PD Probability of Default Rating, one notch lower than the corporate family rating, reflects a 65% family recovery rate per Moody's Loss Given Default Methodology. Historical recovery studies indicate that corporate capital structures comprised solely of bank debt have higher recovery values than those that utilize a combination of first lien bank debt and other debt instruments.

The Speculative-Grade Liquidity assessment of SGL-2 indicates good liquidity profile over the next 12 months. PGT is forecasted to generate respectable to relatively strong positive free cash flow and maintain cash balances in excess of $30 million over the next four quarters. In addition, the company's liquidity profile is enhanced by its proposed $35 million first lien revolving credit facility that matures in 2019. The revolving credit facility is projected to remain undrawn. There are limited constraints on the company's access to revolving credit facility as the facility has only one covenant -- total net leverage ratio -- that takes effect when the company has aggregate outstandings in excess of 20% of the total revolving facility. From alternate liquidity perspective e.g., asset sales to raise cash -- the company's options are limited because all of its assets are encumbered.

The stable outlook reflects Moody's view that the company's credit metrics continue to improve over the next 12-18 months.

The ratings could be downgraded if PGT is unable to maintain its current credit metrics. Also, ratings could be lowered if the company makes debt financed acquisitions resulting in an increase in debt leverage. Further, any material deterioration in the company's liquidity profile will cause a concern and the ratings could be lowered if the company engages in shareholder friendly activities using debt as a financing vehicle.

The ratings could be upgraded once the company has expanded its geographic reach and product mix. Additionally, an improvement in credit metrics from current levels will be considered.

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