March 20, 2012 / 9:23 PM / 5 years ago

S&P Afrms New Enterprise Stone & Lime 'b-' Rtg; otlk stable

March 20 (Reuters) - Overview	
     -- U.S.-based New Enterprise Stone & Lime Co. Inc. (NESL) closed on its 	
$265 million senior secured notes due 2018 and new $170 million asset-based 	
revolving credit facility due in 2017.	
     -- We removed all the ratings from CreditWatch where they were placed 	
with negative implications of Feb. 29, 2012.	
     -- We are affirming our 'B-' corporate credit rating on the company. We 	
have also assigned a 'B-' issue-level rating to the new $265 million 13% 	
senior secured notes due 2017, and lowered our rating on the existing $250 	
million 11% senior unsecured notes due 2018 to 'CCC' to reflect weaker 	
recovery prospects on this issue. 	
     -- The stable outlook is based on our assessment that the company will 	
generate modest positive free cash flow and maintain adequate liquidity for 	
the next one to two years.	
	
Rating Action	
On March 20, 2012, Standard & Poor's Ratings Services affirmed its 'B-' 	
corporate credit rating on New Enterprise, Pa.-based New Enterprise Stone & 	
Lime Co. Inc. (NESL). The rating outlook is stable.	
	
At the same time, we assigned our 'B-' issue-level rating (the same as the 	
corporate credit rating on the company) to NESL's new $265 million 13% senior 	
secured notes due 2018. We assigned the notes a recovery rating of '3', 	
indicating our expectation of meaningful (50% to 70%) recovery for lenders in 	
the event of a payment default. We also lowered the issue rating on the 	
company's existing $250 million 11% senior unsecured notes due 2018 to 'CCC' 	
from 'B-'. We revised the recovery rating to '6' from '4', indicating our 	
expectation of negligible recovery (0% to 10%) for lenders in the event of a 	
default.	
	
We removed all the ratings from CreditWatch where they were placed with 	
negative implications Feb. 29, 2012.	
	
Rationale	
The rating on NESL reflects our assessment of the company's "weak" business 	
risk and "highly leveraged" financial risk (as our criteria define the term). 	
The weak business risk profile is due to NESL's limited geographic diversity, 	
small size and scale of operations, highly competitive end markets, and 	
continued long term uncertainty over Federal and State highway spending. Our 	
assessment of a highly leveraged financial risk profile reflects high debt 	
balances with leverage of adjusted debt/EBITDA of over 7x, offset somewhat by 	
an improved liquidity profile, which we deem to be "adequate" under our 	
criteria, as a result of the recent refinancing.	
	
We expect demand for NESL's aggregates products, highway construction, and 	
safety services to be flat to slightly up for the company fiscal year, which 	
ends Feb. 28, 2013. We expect sales to be flat to up perhaps 2% as continued 	
uncertainty over the timing and size of a new Federal highway bill, as well as 	
continuing debate in Pennsylvania, NESL's primary market, over longer term 	
infrastructure spending, possibly constraining near term growth prospects. 	
These negatives could be partially offset by some improvement in residential 	
end markets as housing slowly recovers and by continued demand in aggregates 	
from private non-residential construction in Pennsylvania, most notably from 	
development of energy sites related to the Marcellus Shale. Overall, however, 	
we do not expect the company to reduce leverage significantly in its current 	
fiscal year.	
	
Based on these assumptions, we estimate NESL's EBITDA will also be flat at 	
about $80 million to perhaps slightly up due to our modest increase in sales 	
volumes assumptions offset by some cost pressures resulting from a competitive 	
operating environment. However, NESL's high debt balances, projected at about 	
$600 million when adjusted for operating leases, results in leverage of over 	
7x. Our forecast is highly sensitive to the level of spending for highways, 	
roads, and bridges at the federal and state level, by Pennsylvania's highway 	
spending tends to be relatively stable, but continued delay in authorizing a 	
new Federal highway bill in 2012, as well as continued increases in energy 	
costs, most prominently diesel fuel, could result in lower profitability. 	
	
NESL is a primary operating and holding company encompassing aggregates, 	
asphalt and concrete production, heavy/highway construction and paving, and 	
traffic safety services and equipment. Standard & Poor's generally views 	
NESL's aggregates businesses as favorable due to high barriers to entry 	
resulting from difficulties in permitting and opening new quarries. In 	
addition, aggregates and asphalt and paving end markets are generally regional 	
in nature because transportation costs are high relative to the value of the 	
product. Also, aggregates and asphalt companies typically have a high variable 	
cost structure. While these are favorable characteristics, there is 	
significant risk related to NESL's current operations being concentrated in 	
Pennsylvania and western New York.	
	
Liquidity	
In our view, NESL's liquidity position is adequate as defined by our criteria, 	
derived mostly from availability on its new $170 million asset based revolving 	
credit facility due 2017 and our projected fiscal 2011 cash flow from 	
operations of about $35 million. Based on these assumptions, we expect:	
	
     -- Sources of liquidity are sufficient, in our view, to cover uses by at 	
least 1.2x over the next 12 months; and 	
     -- Liquidity sources will continue to exceed uses, even if EBITDA were to 	
decline 15%.	
	
	
Liquidity consists primarily of cash on hand and availability under a $170 	
million asset-based revolving credit facility that matures in 2017. We expect 	
cash and available borrowing capacity to meet our criteria for an "adequate" 	
liquidity descriptor, even when working capital needs are seasonally high 	
(typically up to $100 million in the spring and summer months), and for the 	
company to be modestly cash flow positive on an annual basis. We expect the 	
company to maintain availability of between $70 million and $100 million at 	
all times. 	
	
Other liquidity uses appear manageable and include capital expenditures of 	
approximately $30 million. If necessary, NESL could scale back capital 	
spending to a maintenance level of about $20 million. As a result of the 	
refinancing, debt maturities are manageable at about $4 million per year.	
	
Except for a fixed charge coverage ratio of 1 to 1 that is invoked only if 	
borrowing base availability falls below about $25 million, the company is not 	
subject to any financial ratio coverage tests.	
	
Recovery analysis	
For the complete recovery analysis, see Standard & Poor's recovery report on 	
NESL to be published on RatingsDirect following the release of this report.	
	
Outlook	
The stable outlook reflects our expectation that NESL will maintain adequate 	
liquidity to meet all of it obligations in next 12 to 24 months. We expect 	
that end-market demand for NESL's asphalt paving and aggregates products will 	
not decline materially over the next 12 months because of a likely modest 	
increase in private nonresidential and housing construction and relatively 	
flat infrastructure spending in Pennsylvania. As a result, NESL is likely to 	
remain highly leveraged with adjusted debt/EBITDA of about 7x and cash 	
interest coverage of about 2x. 	
	
To raise the rating, we would expect NESL to increase EBITDA to $100 million 	
or more and to reduce leverage to 6x or less through better-than-expected 	
operating performance. To achieve this EBITDA, we think sales would have to 	
increase to over $800 million or about 15% above current levels.	
	
We could take a negative rating action if liquidity narrowed meaningfully due 	
to reduced earnings stemming from a large unexpected decrease in state and 	
federal highway spending or a sharp rise in energy costs. 	
	
Related Criteria And Research	
     -- Methodology and Assumptions: Liquidity Descriptors for Global 	
Corporate issuers, Sept. 28, 2011.	
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 	
May 27, 2009	
     -- Key Credit Factors: Business And Financial Risks In The Global 	
Building Products And Materials Industry, Nov. 19, 2008	
	
Ratings List	
Ratings Affirmed; Off CreditWatch/Outlook Stable	
                                        To                 From	
New Enterprise Stone & Lime Co. Inc.	
 Corporate Credit Rating                B-/Stable/--       B-/Watch Neg/--	
	
Downgraded	
New Enterprise Stone & Lime Co. Inc.	
 Senior Unsecured                       CCC                B-/Watch Neg	
  Recovery Rating                       6                  4	
	
New Rating	
New Enterprise Stone & Lime Co. Inc.	
 Senior Secured	
  US$265 mil 13.% nts due       2018    B-    	
   Recovery Rating                      3

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