Fitch Affirms USG's IDR at 'B' & Rates $350MM Sr. Unsecured Offering 'BB/RR1'; Outlook to Negative

CHICAGO, Nov 05, 2010 (BUSINESS WIRE) -- Fitch Ratings has affirmed the ratings of USG Corporation /quotes/comstock/13*!usg/quotes/nls/usg (USG 14.91, +0.71, +5.00%) as follows:

--Issuer Default Rating (IDR) at 'B';

--Secured bank credit facility at 'BB/RR1';

--Senior unsecured guaranteed notes at 'BB/RR1'.

Fitch has also assigned a 'BB/RR1'rating to USG's private offering of $350 million of senior unsecured notes. The new issue will be guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries.

The company intends to use the net proceeds from the sale of the notes for general corporate purposes, which may include the repayment of indebtedness, working capital, capital expenditures and acquisitions.

As a result of the new debt issuance, the Recovery Rating on USG's existing senior unsecured notes that are not guaranteed by the company's subsidiaries are being lowered as follows:

--Senior unsecured notes to 'B-/RR5' from 'B/RR4';

--Convertible senior unsecured notes to 'B-/RR5' from 'B/RR4'.

The Rating Outlook has been revised to Negative from Stable.

Fitch's Recovery Rating (RR) of 'RR1' on USG's $500 million secured revolving credit facility and $650 million unsecured notes indicates outstanding recovery prospects for holders of these debt issues. (The $650 million unsecured notes are guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries.) Although the senior unsecured notes are effectively subordinate to the company's secured debt, including the $500 million secured revolving credit facility, the recovery prospects for both of these debt classes are similar given USG's strong asset coverage. Fitch's 'RR5' on USG's senior unsecured notes that are not guaranteed by the company's subsidiaries indicates below average recovery prospects for holders of these debt issues. Fitch applied a liquidation analysis for these RRs.

The rating for USG is based on the company's leading market position in all of its businesses, strong brand recognition, its large manufacturing network and sizeable gypsum reserves. Risks include the cyclicality of the company's end-markets, excess capacity currently in place in the U.S. wallboard industry, volatility of wallboard pricing and shipments and the company's high leverage.

The Negative Outlook reflects the expectation that underlying demand for the company's products will remain weak through 2011. While Fitch expects to see moderate improvement in housing metrics as well as home improvement spending next year, these positives will likely be largely offset by the continued decline in commercial construction spending. (Roughly 1/3 of the company's sales are directed to the new commercial construction market.) Within this environment, selling price increases for its gypsum wallboard product may be challenging. Fitch expects operating margins will improve next year, although they are likely to stay in negative territory. Given the weak margins, the company will be challenged to generate free cash flow next year. Nevertheless, USG has solid liquidity with $400 million of cash, $144 million of short- and long-term marketable securities and $144 million of availability under its revolving credit facilities in the U.S. and Canada. This liquidity should give the company financial flexibility to deal with soft underlying demand for its products in the intermediate term. The new notes issuance further enhances the company's strong liquidity position.

USG markets its products primarily to the construction industry, with approximately 20% of the company's 2009 net sales directed toward new residential construction, 31% derived from new non-residential construction, 47% from the repair and remodel segment (commercial and residential) and 2% from other industrial products. In the past, earnings stability in the building materials segment has been driven by end-market diversification - historically, weakness in residential demand has been largely offset by commercial/industrial strength and/or repair and remodel spending. This has not been the case in 2009 and 2010, wherein most of USG's end-markets were in decline simultaneously although at different stages of correction. Statistical and anecdotal information suggest that a bottom was reached for U.S. housing, though early-stage recovery has been much more muted than average.

Fitch currently projects total housing starts will improve 3.6% this year and increase 15.8% in 2011. During the first 12-24 months off this bottom, the recovery may appear jaw-toothed as substantial foreclosures now in the pipeline present as distressed sales, and as meaningful new foreclosures arise from Alt-A and option adjustable-rate mortgage resets. Home improvement spending is projected to grow 3.5% in 2010 (following three consecutive years of decline) and is expected to improve 4% next year. A pick-up in home sales, particularly in existing home sales, combined with a growing economy should lead to higher spending on home renovations in 2011. Commercial construction started to weaken early in 2009 and that pattern continued and intensified in 2010. Commercial construction is projected to decrease further next year. Fitch currently projects private non-residential construction spending (as measured by the Census Bureau) to decline 20% in 2010 and 8% in 2011.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 13, 2010);

--'Liquidity Considerations for Corporate Issuers' (June 12, 2007.

Applicable Criteria and Related Research:

Corporate Rating Methodology

Liquidity Considerations for Corporate Issuers


SOURCE: Fitch Ratings