OREANDA-NEWS. S&P Global Ratings today assigned its 'B+' issue-level rating and '3' recovery rating to Dallas-based Builders FirstSource Inc.'s proposed $750 million senior secured notes due 2024. We also affirmed our 'B+' issue-level rating and '3' recovery rating on Builders' $600 million first-lien term loan due 2022 (original issue amount; $471 million outstanding pro forma for the transaction). Finally, we affirmed our 'B-' issue-level rating and '6' recovery rating on Builders' $700 million senior unsecured notes due 2023. The '3' recovery rating on the senior secured notes and term loan indicates our expectation for meaningful (50%-70%, lower half of the range) recovery in the event of a payment default. The '6' recovery rating on the senior notes indicates our expectation for negligible (0%-10%) recovery in the event of a payment default.

Builders will use proceeds from the proposed senior secured notes to refinance its existing $350 million senior secured notes due 2021 (original issue amount; $583 million outstanding as of June 30, 2016) and partially redeem its existing $600 million first-lien term loan due 2022 (original issue amount; $596 million outstanding as of June 30, 2016).

While the transaction raises leverage, our ratings incorporate an expectation that leverage would remain in the 5x-6x range. Despite the increase in debt, we continue to expect the company to generate meaningful free cash flow. Our ratings also reflect the company's position as the largest distributor of building products in the U. S.; the inherent volatility of profitability of building materials distributors; and Builders' lack of end market diversity, with two-thirds of its sales correlated to the highly cyclical single-family residential construction sector.

The corporate credit rating on Builders FirstSource is 'B+', with a stable outlook. For the corporate credit rating rationale on Builders FirstSource, see the research update published July 22, 2016, on RatingsDirect.

RECOVERY ANALYSISKey analytical factors

S&P Global Ratings' simulated default scenario contemplates a default occurring in 2020 in the wake of a prolonged material downturn in the U. S., leading to a decline in volume; overcapacity dynamics in the industry; commodity-like nature of the company's products; and loss of market share due to a more competitive operating environment. As revenues and margins decline, the company finds itself in the position of having to fund operating losses/debt service with available cash and, to the extent available, its asset-based lending (ABL) facility. Eventually, the company's liquidity and capital resources become strained to the point where the company cannot continue to operate absent a bankruptcy filing, after which we would assume a reorganization.

Our use of a 5.5x multiple for Builders is consistent with our typical 5x-6x multiple range for most building materials companies.

Simulated default assumptionsYear of default: 2020EBITDA at emergence: $210 millionImplied enterprise valuation (EV) multiple: 5.5xGross EV: $1.2 billionSimplified waterfallNet EV (after 5% administrative costs): $1.1 billionEstimated priority claims (60% usage of $800 million ABL facility, net of about $80 million of undrawn letters of credit): $410 millionRemaining value: $685 millionEstimated senior secured claims: (term loan: $465 million; senior secured notes: $780 million): $1.2 billion--Recovery expectation: 50% to 70% (lower half of range)Remaining value for senior unsecured notes: $0--Recovery expectation: 0% to 10%