S&P Upgrades USG Corp. (USG) to 'BB+'; Removes from CreditWatch
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S&P Global Ratings said today it raised its corporate credit rating on USG Corp. (NYSE: USG) to 'BB+' from 'BB' and removed the rating from CreditWatch, where we had placed it with positive implications on Aug. 29, 2016.
At the same time, we raised the issue-level rating on the company's guaranteed senior notes to 'BB+' from 'BB' (in line with the corporate credit rating). The recovery rating on notes remains capped at '3', indicating our expectation for meaningful recovery (50%-70%; upper half of the range) in the event of a default.
In addition, we raised the issue-level rating on the company's nonguaranteed senior notes and industrial revenue bonds to 'BB+' from 'B+'. Due to the repayment of senior debt, we revised the recovery rating on these facilities to '3', where it is capped, from '6', indicating our expectation of meaningful (50%-70%; upper half of the range) recovery in the event of default.
We also removed the ratings on the guaranteed and unguaranteed notes from CreditWatch, where we had placed them with positive implications on Aug. 29, 2016.
"The stable outlook reflects our expectation that USG will maintain credit measures within the intermediate category over the next 12 months," said S&P Global Ratings credit analyst Kimberly Garen. "We expect leverage ratios will improve further to the lower end of the range in 2017."
We do not view an upgrade as likely in 2017, because we do not expect USG will lower and maintain debt leverage further to the modest category (sustained debt to EBITDA of less than 2x). We think an upgrade to investment grade would be predicated on an improvement in the company's business risk profile to satisfactory from the current fair. For this to occur, in our view, USG would either have to diversify its business lines to include products less correlated to housing cycles and/or, it would need to demonstrate less earning volatility through the next building downturn.
We do not believe a downgrade is likely within the next 12 months given our forecast for further improvement in U.S. construction markets. Still, a downgrade could occur in a recessionary environment, causing U.S. housing starts to contract and USG's debt leverage to be sustained above 3x. However, our economists place only a 20% to 25% probability on a new recession.
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