S&P Raises Interface (TILE) to 'BB+'; Industry Fundamentals Improving

Standard & Poor's Ratings Services raised its corporate credit rating on Atlanta, Ga.-based Interface Inc. (Nasdaq: TILE) to 'BB+' from 'BB'. The outlook is stable. At the same time, we raised the issue-level ratings on the senior notes one notch to 'BB+' from 'BB'. The recovery ratings remain unchanged at '3', indicating our expectation of meaningful (50% to 70%) recovery in the event of default.

The company recently announced its intention to redeem its senior notes before year-end. At that time, we would withdraw the issue-level ratings on the senior notes.

"The upgrade reflects our expectation that improving industry fundamentals will boost the company's EBITDA, resulting in credit measures sustained at levels commensurate with an 'intermediate' financial risk profile, with leverage about 2x and funds from operations to debt about 35%," said Standard & Poor's credit analyst Maurice Austin.

Our "satisfactory" business risk profile assessment of Interface reflects its 35% market share in the worldwide modular carpet segment, which has been growing faster than the rest of the floor covering market over the past decade, and its participation in the replacement and remodeling market, which typically has been less cyclical than new construction. The company also primarily serves commercial customers and would benefit from a rebound in currently weak commercial construction levels. In the longer term, we expect the company to benefit from its international diversification and expansion into newer segments, such as its FLOR retail stores. Tempering these strengths is the company's participation in a highly competitive industry, as well as its exposure to volatile raw material costs, particularly resins. We view the company's liquidity to be "adequate."

Interface Inc. manufactures carpets, principally modular tiles, but also broadloom, principally for the commercial market. Interface caters primarily to the specified market, in which products are manufactured to the specifications of architects and designers, compared with the nonspecified markets, in which products are purchased off the shelf.

Our stable rating outlook on Interface Inc. reflects our expectations that sales of its modular carpet and other products will grow in the mid-single digits over the next year, in line with our view of the overall economy. We also expect leverage (currently 2.2x) of about 2x with FFO to debt of about 35%, commensurate with our assessment of an "intermediate" financial risk profile.

We would lower the rating during the next 12 months if forecasted EBITDA fell more than 35% and leverage exceeded 3x. This could occur if commercial demand dropped sharply, perhaps because of a deep global recession, and if raw materials costs spiked.

We consider an upgrade as highly unlikely in the next year. However, we would consider an upgrade if there is a significant change in the business risk profile in which Interface gains additional size and scope such that we would reconsider our assessment of its "satisfactory" business risk.

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