OREANDA-NEWS. S&P Global Ratings said today it affirmed its 'BB-' corporate credit rating on South Jordan, Utah-based Headwaters Inc. The outlook is stable.

At the same time, we are lowering our issue-level rating on the company's first-lien senior secured bank term loan credit facilities to 'BB-' from 'BB', in line with the company's corporate credit rating.

Headwaters will add $350 million of incremental term loan B debt to the existing $421 million facility. The recovery rating on the $771 million senior secured debt is '3', which indicates our expectations for meaningful (50%-70%) recovery (at the higher end of the range) in the event of a payment default.

"The stable rating outlook reflects our expectation that Headwaters will maintain credit measures consistent with a significant financial risk profile as the improvement in housing starts and nonresidential construction will result in better operating performance and deleveraging from the 4x leverage pro forma for the new financing," said S&P Global Ratings credit analyst Kimberly Garen. "As a result, we expect the company to remain in line with our assessment of its significant financial risk profile."

We believe that a downgrade is unlikely within the next 12 months based on our favorable view of industry fundamentals. However, we could lower the ratings if the improvement in residential construction activity or fly ash demand is less than expected, or if a new recession causes a retraction in housing starts and remodeling activity, such that leverage increases more than about 4.5x and trending toward 5x, causing us to revise our assessment of financial risk profile.

We could raise the rating within the next 12 months if 2016 sales growth exceeded 13%, with gross margins greater than 35%, resulting in leverage likely to be maintained at about 3x and FFO to debt to be maintained at more than 30% due to both organic growth and acquisitive nature. This could occur if there were a greater-than-expected recovery in residential and commercial construction.