Quanex (NX) Assigned 'BB-' Corp. Rating by S&P

Standard & Poor's Ratings Services said it assigned its 'BB-' corporate credit rating to Houston-based window component manufacturer Quanex Building Products Corp. (NYSE: NX). The outlook is stable.

At the same time, we have assigned our 'BB' issue-level rating to the company's proposed $310 million secured term loan. The recovery rating is '2', indicating our expectation of substantial (70%-90%; at the higher end of that range) recovery in the event of a default.

"The stable outlook reflects our expectation that Quanex will reduce leverage from current levels of about 3.4x debt to EBITDA to below 3x or below and that funds from operations to debt will approach 30% over the next year, based upon our expectations of continued growth in U.S. housing starts and residential repair and remodeling spending, both of which drive demand for windows and kitchen cabinets," said Standard & Poor's credit analyst Thomas Nadramia.

Based on our view of improving repair and remodeling markets and home construction, we consider a negative rating action as unlikely in the next 12 months. However, we would downgrade the company if it took on a much more aggressive financial policy, incurring debt to fund acquisitions, dividends, or share repurchases such that debt to EBITDA leverage was sustained above 4x.

We view an upgrade an unlikely over the next year given our view of Quanex's relatively narrow product focus (window and cabinetry components), the cyclical nature of its end markets, and the company's relatively modest size. However, we would consider an upgrade to 'BB' if Quanex diversified its business segments and increased its size and earnings, resulting in our revising its business risk assessment to "fair" from weak. We could also upgrade Quanex if the company reduced and maintained leverage comfortably in intermediate category 2x to 3x) even through cyclical downturns.

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