Moody's Assigns 'Ba1 Rating to Eagle Materials (EXP)

Moody's Investors Service assigned a Ba1 Corporate Family Rating and a Ba1-PD Probability of Default Rating to Eagle Materials Inc.("Eagle Materials")(NYSE: EXP). Moody's also assigned a Ba1 rating to Eagle Material's proposed $300 million senior unsecured notes. The Speculative Grade Liquidity assessment is SGL-1 and the rating outlook is stable. This is the first time Moody's has assigned a rating to this issuer.

On July 25, 2016, Eagle Materials announced a registered public offering of $300 million of senior notes due 2026. The net proceeds from the notes offering will be used to repay approximately $295 million of borrowings under its revolving credit facility and related fees.

The following ratings were assigned:

Corporate Family Rating, assigned Ba1;

Probability of Default Rating, assigned Ba1-PD;

$300 million senior unsecured notes, assigned at Ba1 (LGD4);

Speculative Grade Liquidity assessment, assigned at SGL-1;

The rating outlook is stable.

RATINGS RATIONALE

Eagle Materials' Corporate Family Rating of Ba1 benefits from the company's conservative financial profile, solid operating margin and strong cash flow generation. The ratings also incorporate Eagle's moderate geographic, product and end market diversity. Offsetting these strengths is the company's small size relative to its national and global competitors, and the highly competitive and cyclical nature of its businesses. Eagle's products are commodity-like and prices are sensitive to changes in supply and demand. We note the Ba1 CFR affords Eagle Materials ample financial flexibility to pursue its growth strategy given its current credit and financial profile.

Eagle Materials has historically operated with conservative financial leverage. Adjusted debt-to-EBITDA was 1.5x for the fiscal year ended March 31, 2016, and has ranged from 1.5x to 3.0x over the past five years. We expect Eagle Materials to maintain adjusted debt-to-EBITDA below 2.5x, but note that the company could exceed this level as it pursues its growth strategy.

Revenue totaled $1.1 billion in fiscal year 2016, a 17% increase over the prior year reflecting increases in all of Eagle's business segments with the exception of its proppants business. The rise in revenue was due primarily to average sale price increases in the cement and concrete and aggregates segments, and sales volume growth in its gypsum wallboard, recycled paperboard and concrete segments. We expect volume and price improvements in Eagle's cement and concrete and aggregates segments through fiscal 2017, though at varying degrees in each of its regions. Increased residential housing construction and repair and remodeling activity will support growth in the company's gypsum wallboard and paperboard sales.

Adjusted operating margin was strong at 20.4%. Demand for Eagle Materials' business primarily stems from residential, industrial, commercial and infrastructure construction end markets, and the oil and gas end market for its frac-sand and oil-well cement products. With the exception of aggregates, all of Eagle's products compete principally on price given their commodity-like nature. As a result, operating performance is highly sensitive to changes in supply and demand.

Eagle Material's SGL-1 reflects strong liquidity over the next 12 to 18 months. For fiscal year 2016, the company's liquidity was supported by $5 million of cash on hand, $109 million available (net of outstanding letters of credit) under its $500 million revolving credit facility, and our expectation that the company will generate over $150 million of free cash flow during fiscal year 2017. Pro forma for the unsecured notes offering, the company will have over $400 million available under its revolver. The revolving credit facility requires the company to maintain a consolidated indebtedness ratio of 3.5x and an interest coverage ratio of 2.5x. We expect the company to remain in compliance and maintain a comfortable cushion under these covenants over the next 12-18 months. The company's debt maturities are manageable over the near-term.

The stable rating outlook reflects our expectation that operating performance and key credit metrics will modestly improve with the recovery in construction spending and repair and remodeling activity.

Moody's indicated that the Eagle Materials could be upgraded if the company were to continue to grow its size and scale profitably across all of its segments. Commitment to defending an investment-grade rating would also be a prerequisite to an upgrade. Adjusted debt-to-EBITDA sustained below 2.5x and adjusted debt to book capitalization below 35% would support an upgrade.

A downgrade could result if adjusted Eagle Materials were to experience a material decline in operating performance or free cash flow. This could be evidenced by adjusted debt-to-EBITDA sustained above 3.5x or adjusted operating margin below 11%.

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

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