S&P Lowers Outlook on U.S. Silica (SLCA) to Negative; Sees Weakening Credit Measures on Lower Frac Demand

Standard & Poor's Ratings Services affirmed its 'BB-' corporate credit rating on U.S. Silica (NYSE: SLCA) and revised the rating outlook to negative from stable.

We also lowered our issue-level rating on the company's senior secured term loan to 'BB-' from 'BB' and revised the recovery rating on the debt to '3' from '2', indicating our expectation for meaningful (50% to 70%; upper half of the range) recovery in the event of payment default.

"The negative outlook reflects our assessment of the deterioration in U.S. Silica's credit measures as EBITDA and cash flows are being pressured by lower demand and weaker pricing for hydraulic fracturing, or 'frac', sand as a result of reduced oil and gas drilling and completion activity," said Standard & Poor's credit analyst Ryan Gilmore.

We continue to assess U.S. Silica's financial risk profile as "significant" and the business risk profile as "weak" based on the company's exposure to the volatile and cyclical oil and gas market, which causes broad swings in supply and demand and highly volatile pricing for frac sand. We assess liquidity as "adequate."

The negative rating outlook reflects deterioration in U.S. Silica's credit measures as cash flows are being pressured by lower demand and pricing for frac sand, driving leverage higher over the next 12 months.

We could lower the rating if we no longer deemed liquidity to be "adequate" or if leverage were sustained at 4x or above. This scenario could occur if demand or prices remained stagnant or weakened from current levels. We base the prices assumed in our forecast for leverage on Standard & Poor's published assumptions for oil and gas prices. Any downward revisions to these assumptions could lead to a negative rating action. In addition, we could also consider a negative rating action if the company increased its debt levels to finance a large acquisition or dividend.

It is unlikely that we would raise the rating in the next 12 months given the current weakness in U.S. Silica's operating environment. However, we could raise the rating if the company maintained leverage below 4x while enhancing the business to a level we view is commensurate with a "fair" business risk profile assessment. This could occur if the operating environment improves and current expansion targets are continually achieved. Separately, we could raise U.S. Silica's rating if the company achieved sustainable improvement in credit measures, with leverage of less than 3x and FFO to debt more than 30%.

You May Also Be Interested In

• GameSquare Holdings Inc (GAME) PT Lowered to $5 at Roth/MKM
• Growth isn't weak enough to truly undercut inflation pressures - BMO
• Ellington Credit Company (EARN) Adopts Tax Asset Preservation Plan