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TEXT-S&P revises Boise Cascade outlook to stable from negative
May 30, 2012 / 8:13 PM / 6 years ago

TEXT-S&P revises Boise Cascade outlook to stable from negative

     -- 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. 	
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.	
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.	
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 All ratings affected 	
by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left 	

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