Moody's Raises Outlook on Great Lakes Dredge & Dock Corporation (GLDD) to Positive

Moody's Investors Service changed Great Lakes Dredge & Dock's (Nasdaq: GLDD) outlook to positive from stable due to the company's expected continued improvement in operating performance and financial leverage stemming from its re-focus on its core dredging and environmental remediation businesses post the sale of its loss generating demolition business in April 2014. In addition, the expectation of a moderate improvement in EBITDA margins over the intermediate term as the company executes on its current backlog and generates future business from current bidding activity also underlie the outlook change. Great Lakes' ratings including its Corporate Family Rating ("CFR") and Probability of Default Ratings were affirmed at B3 and B3-PD, respectively. Concurrently, Moody's affirmed the rating on the company's unsecured notes due 2019 at Caa1. Great Lakes' speculative grade liquidity rating ("SGL") was affirmed at SGL-3, reflecting an adequate liquidity profile.

Financial leverage pro forma for the sale of the demolition business has improved meaningfully to 4.0x debt/EBITDA (on a Moody's adjusted basis) for the last twelve month period ended June 30, 2014 from close to 6.0x a year ago when the demolition business was part of the company's operations. Although the demolition business was not a sizable portion of the company's revenue base, contributing 10-15% of revenues prior to the sale, the operating losses, internal control weaknesses and reporting issues the company had faced in that business contributed to net losses in this segment.

The outlook change recognizes the company's re-focus on its core dredging business post the sale of the demolition operations and continued healthy backlog. Great Lakes' ratings are constrained at B3 despite improved credit metrics because of risks associated with the company's announced intention to increase debt levels in order to finance the construction of its new $140 million ATB hopper dredge expected to become operational during the second half of 2016. According to Moody's analyst Gigi Adamo, "the company's liquidity profile is not sufficiently robust to cushion the risks associated with newbuild equipment that is debt-funded and not tied to long-term contracts".

Ratings affirmed:

Corporate Family Rating, at B3;

Probability of Default Rating, at B3-PD;

$250 million 7.375% Senior Unsecured Notes due 2019, at Caa1 (LGD-4)

Speculative Grade Liquidity Rating, affirmed at SGL-3

Outlook actions:

Outlook, changed to Positive from Stable

RATINGS RATIONALE

The affirmation of Great Lakes' B3 CFR reflects the highly cyclical and high fixed-cost nature of the dredging industry, high customer concentration and dependence on government funding priorities. Historical earnings variability from quarter to quarter due to the effect of impacts from adverse weather conditions on equipment utilization, changing funding availability and variation in quarterly backlog levels also underscore the ratings. Additionally, the company's operations abroad contribute to costs related to transporting equipment to these destinations, differences in environmental and regulatory conditions, and greater working capital needs. These factors are counterbalanced by Great Lakes' strong market position in the domestic dredging industry and high barriers to entry created by the Jones Act and the sizable amount of capital required to enter the dredging business.

Great Lakes' SGL-3 liquidity rating reflects Moody's expectation that the company will maintain an adequate liquidity profile over the intermediate term. Free cash flow is expected to be negative due to the higher level of capital expenditures required for the construction of the company's sizable new ATB "Articulated Tug/Barge" hopper dredge. In addition, working capital swings related to the seasonal nature of the business and operating abroad also contribute to variability in free cash flow generation. The ratings anticipate continued usage under the company's $175 million revolving credit facility to fund working capital swings and could be used to partially fund the construction of the ATB dredge. Revolver availability was limited at June 30, 3014 quarter-end with availability of $25 million, largely due to letters of credit outstanding of $114.9 million. However, the company reported cash balances of $38 million as of that date and it does not have any meaningful near-term debt maturities. The company is expected to maintain comfortable headroom under covenants over the intermediate term.

The positive outlook is supported by the company's re-focus on its core dredging business and expectations that operating performance and margins will improve as the company executes on its backlog and generates new business from current bidding activity. In Moody's view, investments the company has made to date could support anticipated expected revenue growth over the intermediate term.

The ratings could be raised if the company improves its liquidity position including revolver availability, continues to report a healthy backlog and debt to EBITDA is sustained below the 4.5 times range, inclusive of ATB dredge-related financing.

A meaningful deterioration in the company's earnings performance, liquidity profile or financial metrics such that debt/EBITDA exceeds 6.0 times could pressure ratings.

The principal methodology used in this rating was Global Construction Methodology published in November 2010. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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