Moody's Upgrades Ply Gem Holdings (PGEM) to 'B1'; Outlook Remains Stable

August 19, 2016 12:24 PM EDT

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Moody's Investors Service upgraded Ply Gem Industries, Inc.'s (NYSE: PGEM) Corporate Family Rating to B1 from B2 and its Probability of Default Rating to B1-PD from B2-PD. Concurrently, Moody's upgraded the rating on the company's first lien term loan due 2021 to Ba3 from B1 and the rating on its senior notes due 2022 to B3 from Caa1. Moody's also affirmed the Speculative-Grade Liquidity (SGL) Rating at SGL-2 and the rating outlook remains stable.

The upgrade of Ply Gem's Corporate Family Rating to B1 reflects the company's shift in financial policy that now places an emphasis on reducing debt on the balance sheet and a desire to operate the business at a lower level of debt leverage. Furthermore, good performance over the past several quarters amidst the continued recovery in Ply Gem's end markets -- new home construction and home repair and remodeling -- has resulted in improved credit metrics. For the full year 2016, we project the company to generate approximately $100 million in free cash flow and to bring its Moody's adjusted debt to EBITDA down to 4.5x, with a further decline to approximately 3.5x in 2017.

Moody's took the following rating actions on Ply Gem Industries, Inc.:

Corporate Family Rating, upgraded to B1 from B2;

Probability of Default Rating, upgraded to B1-PD from B2-PD;

$360 million First Lien Term Loan due 2021, upgraded to Ba3 (LGD3) from B1 (LGD3);

$650 million Senior Notes due 2022, upgraded to B3 (LGD5) from Caa1 (LGD5);

Speculative-Grade Liquidity Rating, affirmed at SGL-2;

The rating outlook remains stable.

RATINGS RATIONALE

Ply Gem's B1 Corporate Family Rating reflects the company's shift in financial policy that will lead to lower debt leverage. Additionally, continued growth in revenues will lead to further EBITDA growth under Ply Gem's improved cost structure. Together, these two factors will push Ply Gem's Moody's adjusted debt to EBITDA to 4.5x by the end of 2016 with further improvement in 2017 to approximately 3.5x. Ply Gem's willingness to voluntarily pay down debt is evident in the $60 million it has put towards non-mandatory term loan payments in 2016 year to date. The rating is also supported by Ply Gem's market position as the leading vinyl siding manufacturer in North America and one of the leading window manufacturers in North America. Ply Gem's diversified product portfolio that features items such as windows and roofing accessories, which are related to projects that cannot be delayed in remodeling work, is a credit positive as well. At the same time, the B1 Corporate Family Rating is constrained by a fairly concentrated customer base, of which the top ten customers accounted for 44% of 2015 revenue. Also, national vinyl siding demand is impacted especially by the Northeast and Midwest regions of the US, which will continue to be laggards in the housing recovery relative to the South and West.

The SGL-2 rating reflects Moody's expectation that the company's liquidity profile will remain good over the next 12 months. The SGL rating takes into consideration internal liquidity, external liquidity, covenant compliance, and alternate sources of liquidity. We expect the company to generate approximately $100 million of free cash flow in 2016 and end the year with around $140 million of cash on the balance sheet. Ply Gem is party to a $350 million asset based revolving credit facility due in November of 2020 that as of July 2, 2016 had no borrowings outstanding. We expect the company to only use the revolver for intra-quarter borrowings over the next 12 months. The credit facility contains a springing fixed charge covenant that tests if availability under the revolver is less than 10% of the borrowing base. We do not expect the covenant to be tested in the next 12 months but if it were, Ply Gem would be in compliance. Alternate sources of liquidity may be limited due to the secured debt in the capital structure.

The stable rating outlook reflects Moody's expectation that Ply Gem's credit metrics will continue to improve as the company's end markets continue to recover.

The ratings could be upgraded if Moody's adjusted debt to EBITDA is sustained below 3.5x, Moody's adjusted EBITA to interest expense is sustained above 4.0x, while the company continues to generate positive free cash flow.

The ratings could be downgraded if the company engages in any debt funded acquisitions or shareholder friendly activities such that Moody's adjusted debt to EBITDA rises above 5.0x. Also, a downgrade could be considered if Moody's adjusted EBITA interest coverage falls below 2.5x and if Ply Gem's end markets enter a downcycle and the company is unable to maintain its credit metrics within the current rating category.



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