OREANDA-NEWS. S&P Global Ratings said today it raised its corporate credit rating on Chicago-based USG Corp. to 'BB' from 'BB-'. The outlook is positive.

At the same time, we lowered the issue-level rating on the company's guaranteed senior notes to 'BB' from 'BB+' (in line with the 'BB' corporate credit rating). In addition, we revised the recovery rating on the notes to '3' from '1'. While our recovery analysis indicates a higher recovery than indicated by our '3' recovery rating (50%-70%; upper half of the range), under our recovery methodology we generally cap the recovery rating for companies with corporate credit ratings in the 'BB' category at '3' to account for the risk that their recovery prospects are at greater risk of being impaired by issuance of additional priority or pari passu debt before default.

In addition, we raised the issue-level rating on the company's nonguaranteed senior notes and industrial revenue bonds one notch to 'B+' from 'B'. The recovery rating on the nonguaranteed senior notes is unchanged at '6', indicating our expectation of negligible (0% to 10%) recovery in the event of default.

"The positive outlook reflects the potential for an upgrade if USG reduces leverage measures to within the intermediate category--debt to EBITDA of 2x-3x and FFO to debt of 30%-45%--over the next 12 months as construction markets continue to improve," said S&P Global Ratings credit analyst Kimberly Garen. "We expect leverage measures will improve further to just 3x by the end of 2016, with the expected repayment of the company's $500 million of notes due November 2016."

We could take a positive rating action within the next 12 months if there continues to be positive movement in new home construction and repair and remodeling spending and USG remains on track to reduce its current debt balances in the second half of fiscal 2016, resulting in improving financial metrics, including sustainable debt-to-EBITDA leverage of below 3x, in line with an intermediate financial risk profile.

We do not believe a downgrade is likely within the next 12 months given our forecast for further improvement in U. S. construction markets. Still, a downgrade could occur in a recessionary environment, causing U. S. housing starts to contract. However, our economists place only a 10% to 15% probability on a new recession.