The Building Materials, Metals, and Wood Products Sectors are Likely to Weather the Hurricanes Without Ratings Damage
We expect the companies in the building products industries to face a near-term hit to their revenue and earnings because of the disruption from Hurricane Harvey in Houston. But we believe that credit ratings at these companies will generally remain stable, as most issuers have sufficient liquidity to fund their working capital investment needs in a short-lived downturn. It also appears to us that most issuers are adequately diversified or insured to absorb this disruption in their Houston-area business. Moreover, we see these companies potentially benefitting for several years from the increased demand as the region rebuilds.
As of Sept. 7, powerful Hurricane Irma had roared through the Leeward Islands and was bearing down on the southeast U.S., with heavily-populated Florida in its path. We believe, however, that the building products industries have a lower asset exposure in Florida than the Texas gulf coast. That could result in even less business disruption and, depending on the storm's exact route, the potential for a significant boost in demand for rebuilding materials.
Frequently Asked Questions
What's the effect of Hurricane Harvey on ratings in sectors like building materials and wood products?
We do not expect any rating changes among the various building materials companies because none appears to have the outsized exposure to the Houston market that would cause any business impairment or financial distress. Short-term earnings may decline relative to our expectations, but not enough to drive materially higher leverage in 2017 for even the most exposed companies. As such, we are assuming that third quarter revenues in 2017 will decline in the region because of logistical disruptions and a possible hit to consumer sentiment, but that reconstruction could boost growth in the fourth quarter and 2018. When reconstruction begins, we expect building materials companies to see heightened demand, particularly for products like wallboard, HVAC systems, and flooring, which are usually among the first items replaced after flooding. Houston-based building materials company NCI Building Systems Inc. estimates that temporary disruptions from Harvey, primarily associated with the readiness of job sites for product delivery, will reduce EBITDA for the fourth quarter of fiscal 2017 (ending Oct. 30) by about 10%, which shouldn't have any impact on our rating (BB/Stable/--).
Lumber and oriented strand board prices continue their upswing, supporting the credit quality of wood products producers in the U.S. and Canada. Reconstruction efforts should boost the demand for wood products almost immediately, usually much faster than production can ramp up. Factors like the stronger Canadian dollar and potential tariffs on imports from Canada support currently elevated prices, and robust demand is supporting steady to higher production volumes.
What's the effect on ratings in steel, aluminum, and other metals?
Direct business exposure for metals and mining companies is limited, such that we expect no rating actions stemming from Harvey. Some issuers in these segments, however, are exposed to the Houston area, either by way of steel for oil and gas tubular products, processing inputs like fracking sand, or steel and aluminum scrap. In general, steel companies could benefit from lower imports because of port constraints, as well as stronger demand from rebuilding and restocking. In addition, lower availability of scrap metals from the area initially supports higher domestic steel prices, although they would reverse as numerous damaged vehicles are scrapped.
Which issuers appear most exposed, and how have any S&P Global Ratings assumptions changed?
So far, only the most narrowly-focused metals producers have indicated any meaningful effect to operations, and these disruptions appear short-lived. Nevertheless, recovery could be sporadic over a few quarters, as more deeply affected suppliers or customers also re-establish their supply chains. Building materials companies are not meaningfully disrupted, because most have geographically dispersed operations and customers.
Oxbow Carbon LLC, for example, has idled its terminal facility and calcining plant in Texas City, but the company expects only a few days of disruption. The plant uses petcoke from surrounding oil refineries, which may themselves face production cuts. Companies like WireCo WorldGroup Inc. (B/Stable/--) and Prince International Corp. (B-/Stable/--) have notable exposure to the region, but likely face only small repairs to facilities and a few weeks of order delays while local business activity ramps back up. As such, we expect that earnings will likely be affected in the second half of 2017 because of reduced cost absorption and higher repair and maintenance expenditures, potentially offset by insurance claims and proceeds.
In contrast, steel service center earnings could get a strong boost from higher volume and throughput, as demonstrated by the higher equity price responses we saw at companies like Reliance Steel & Aluminum Co. and Ryerson Inc. shortly after the storm. In addition, steel importers are likely to have some difficulty getting their products into the country, which has boosted the share prices of domestic producers like U.S. Steel Corp. and AK Steel Corp.
What will S&P Global Ratings be looking at as the situation evolves?
We expect strong demand for materials as repairs begin in earnest, which should benefit wallboard producers USG Corp., Eagle Materials Inc., and Continental Building Supply. HVAC company Lennox International Inc., flooring producer Mohawk Industries Inc., and cabinet/fixtures makers Masco Corp., Fortune Brands Home and Security, and RSI Home Products Inc. also stand to benefit, as will insulation maker Owens Corning. We don't see a risk of any meaningful downgrades among these issuers, given their already solid credit fundamentals and good market conditions. But a trend to significantly higher ratings is also unlikely, given that such major events cause only a temporary boost without altering competitive dynamics, and ongoing appetite for shareholder returns likely limits the potential for stronger credit measures.
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