Overview -- The U.S. housing market recovery appears to be firming after several previous false starts, in our view. -- We expect Idaho-based building products company Boise Cascade to post improved sales in 2012 with higher EBITDA and lower leverage. -- We revised our outlook on Boise Cascade to stable and affirmed our ratings, including our 'B+' corporate credit rating on the company. -- The stable outlook assumes that revenues grow in line with our forecast for U.S. housing starts and that gross margins hold steady such that leverage returns closer to the 4x-5x EBITDA range by early 2013. Rating Action On May 30, 2012, Standard & Poor's Ratings Services revised its outlook on Boise Cascade LLC to stable from negative. At the same time, we affirmed our ratings on the company, including the 'B+' corporate credit rating. Rationale Our outlook revision reflects our view that the building products company's revenues will increase in line with our forecast for U.S. housing starts and that the company's gross margins will hold steady such that leverage drops toward 4x-5x EBITDA by early 2013. The 'B+' corporate credit rating on Idaho-based Boise Cascade LLC reflects our view of the building products company's "weak" business risk and its "aggressive" financial risk. Weaknesses include exposure to highly volatile new home construction and modest revenues and EBITDA that are only beginning to recovery from deep cyclical lows. However, the company maintains a strong liquidity profile and the housing recovery is gaining momentum, in our view. Boise Cascade's sales improved modestly off cyclical lows, to $2.2 billion in 2011. Our baseline scenario assumes revenues grow 18% in 2012 and 37% in 2013. These gains are in line with our economists' forecast for U.S. housing starts. Our baseline scenario assumes that gross margins hold steady at about 11% (on limited pricing power and steady input costs) but that EBITDA margins gradually improve to about 3% by 2013 (as overhead costs are spread over a larger revenue base). We expect EBITDA in the $30 million to $40 million range in 2012, rising closer to $100 million in 2013. This implies leverage of about 9x EBITDA in 2012 and closer to 4x in 2013. We also assume that funds from operations (FFO) will strengthen closer to 20% of debt by the end of 2013. This baseline scenario does not assume that the company repays or refinances its only debt obligation (a $220 million subordinated note that matures in 2014 but can be called later in October 2012). Boise Cascade is a privately held limited liability company sponsored by Madison Dearborn Partners LLC, a Chicago-based private equity firm. Boise Cascade operates two primary segments. Its building materials segment distributes a broad line of products used in residential construction. Its wood products segment manufactures engineered wood products, plywood, and lumber. 2011 revenue from these two segments was down roughly 40% from the cyclical peak in 2005, supporting our view that the wood-based building products industry is fragmented, oversupplied, and highly cyclical. Liquidity In our opinion, Boise Cascade maintains a strong liquidity position based upon the following observations and estimates and in accordance with our criteria: -- We expect sources of liquidity to exceed estimated uses by more than 1.5x over the next 12 months and by over 1.0x over the next 24 months. -- We expect sources of liquidity to exceed estimated uses even if EBITDA declined by 30%. -- In our view, Boise Cascade currently possesses the ability to absorb high-impact, low-probability events. Under our baseline scenario, we expect Boise Cascade to generate positive FFO, but post a modest free operating cash flow deficit over the next 12 months--after an estimated $30 million to $40 million of capital expenditures. We do not expect the company to pay dividends to its sponsors in 2012, and the company does not face any debt maturities until $220 million of senior subordinated notes come due in October 2014. Our liquidity analysis does not anticipate corporate acquisitions. Sources of liquidity primarily include $164 million of cash as of March 31, 2012, and $208 million available on a $250 million asset-based revolving credit facility that matures in July 2016. However, the revolver maturity will accelerate to July 2014 if the senior subordinated notes are not repaid or refinanced by that time. We do not expect Boise Cascade to be subject to a springing interest charge coverage covenant in 2012 because we do not anticipate availability under the revolver to drop below the $31 million minimum threshold, given manageable near-term working capital needs. Recovery analysis Boise Cascade's $220 million senior subordinated notes are rated 'B+' (the same as the corporate credit rating, with a '3' recovery rating. The '3' recovery rating indicates our expectation for meaningful (50%to 70%) recovery in the event of a payment default. For the complete recovery analysis, see Standard & Poor's recovery report on Boise Cascade published soon after this report on RatingsDirect. Outlook The stable outlook reflects our baseline view that the U.S. housing market recovery is finally gaining momentum after several previous false starts. We expect housing starts to improve by 18% in 2012 and for Boise Cascade's revenues to improve at a similar rate. Under this scenario, we expect leverage to drop below 10x. This is still high relative to our "aggressive" financial risk assessment but, in our view, leverage will be tracking toward 4x to 5x EBITDA by mid-2013. An upgrade is unlikely in the next 12 months given our view that key credit measures will only be approaching levels minimally supportive of the current rating. Furthermore, positive rating actions are constrained by the indeterminate medium-to-long term financial policies relating the company's private equity owners. We would lower our rating if our outlook for a more robust housing recovery proves optimistic and housing starts do not improve over 2011 levels. This could occur if the U.S. economy slips back into recession and already high unemployment increases. In this alternative downside scenario we would expect leverage to remain above 15x EBITDA and for FFO to be slightly negative. Related Criteria And Research -- Industry Report Card: U.S. Natural Resources Companies Hang On To Ratings Stability Amid A Gradual Recovery, April 27, 2012. -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011. -- Key Credit Factors: Business And Financial Risks In The Global Building Products And Materials Industry, Nov. 19, 2008. -- Credit FAQ: Knowing The Investors In A Company's Debt And Equity, Apr. 4, 2006 Ratings List Ratings Affirmed; Outlook Stable To From Boise Cascade LLC Corporate Credit Rating B+/Stable/-- B+/Negative/-- Subordinated B+ Recovery Rating 3 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.