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Associated Materials Bonds Dive as Loss Grows: Corporate Finance

April 10, 2012

Bonds of Associated Materials LLC (3214694Q:US) are plummeting as widening losses and executive departures leave the residential building products maker owned by Hellman & Friedman LLC with limited ability to pay down its bank debt.

The company’s $730 million of 9.125 percent notes due November 2017 have fallen 6.1 cents this month to 91.3 cents on the dollar to yield 11.3 percent after a March 30 regulatory filing from Cuyahoga Falls, Ohio-based manufacturer showed that its 2011 operating loss quadrupled to $147 million as sales in its windows unit deteriorated.

Associated Materials, purchased by private-equity firm Hellman & Friedman for $1.3 billion in 2010 replaced its chief executive and chief financial officer last year. Deteriorating results make it likely the company, which has not had net income since 2007, is out of compliance with requirements of a $225 million credit facility that matures in October 2015, according to Peter Doyle of Moody’s Investors Service.

“Too many things were going against the company and management didn’t react fast enough,” said Doyle, a New York- based analyst. “One could say the greatest risk now is execution risk.”

Moody’s downgraded its bond rating on Associated Materials to Caa1 on April 3 with a “negative” outlook. The rating indicates debt of “poor standing” that is “subject to very high credit risk,” according to Moody’s. The rating firm cited “slow growth prospects” in the home repair, remodeling and construction markets in an April 4 note.

‘Disappointing Year’

Standard & Poor’s rates the company B with a “negative” outlook.

Kelly Smith of Abernathy MacGregor Group, a spokeswoman for Hellman & Friedman, declined to comment on Associated Materials finances. A call to Chief Executive Jerry Burris was referred to Robert Schindler, the Associated Materials vice president of marketing, who did not return it.

Burris said during an April 5 conference call to discuss the company’s 2011 results with analysts and investors that “it was a challenging and disappointing year.”

Window sales (3214694Q:US), which represent 28 percent of the company’s revenue and provide higher operating profit margins than its roofing and vinyl siding businesses, were down 28 percent in the fourth quarter according to Gimme Credit, a New York-based credit-analysis firm.

Window Sales

The company attributed the decline to weakness in the construction industry and the end of a federal energy tax credit, “but we believe the biggest reason was the loss of a major” windows customer or customers to Ply Gem Industries Inc., the maker of specialty products for the home improvement industry, according to Vicki Bryan, an analyst in Gimme Credit’s high-yield group.

“Windows is still in a free-fall,” Bryan said in a telephone interview. “We have no indication that they have fixed that problem.”

Associated Materials had $1.16 billion of sales (3214694Q:US) last year, about the same as $1.17 billion in 2010, according to the March 30 regulatory filing. Adjusted earnings before interest, taxes, depreciation and amortization dropped about 28 percent to $96.8 million in 2011, the filing shows. Full-year window sales fell about 17 percent to $362.6 million, the filing shows.

The company has expanded its distribution of roofing supplies, a “lower margin business than window manufacturing,” Moody’s said in its April 4 report. Associated Materials was also hurt by higher raw material costs for commodities such as vinyl resin, aluminum, steel and glass, according to Moody’s.

‘Discretionary Item’

Demand for vinyl siding and windows, the company’s primary products, will remain limited for the rest of year, according to Moody’s. “Consumers are likely to delay major upgrades, because exterior siding is a discretionary item and rarely needs to be replaced, except when damaged due to weather,” Doyle wrote in the April 4 report.

Burris became president (3214694Q:US) and CEO of Associated Materials in September, replacing Tom Chieffe. Last month, the company said it hired Paul Morrisroe as chief financial officer, taking over for Stephen Graham.

The company said in a June 2 statement that Chieffe was leaving to “to pursue other interests.”

“Disappointing” results were partly due to “serious internal troubles” that showed up after the buyout by Hellman & Friedman in 2010, according to the Gimme Credit report.

“They have increased their focus on liquidity, which is getting really, really tight,” said Bryan. “When a company has to rely on its bank line for liquidity, that’s not good.”

Rising Debt

Associated had $804 million of long-term debt (3214694Q:US) at the end of last year, up from $788 million at the start of 2011, according to the regulatory filing. Its borrowings at the end of December consisted of $730 million of 9.125 percent notes due 2017 and $74 million under its asset-based revolving line of credit, the filing shows.

“The company likely won’t have enough earnings to cover fixed-charge costs as defined in their credit agreement,” said Doyle. While it won’t be forced to test the covenant at this time, “that means they are going to lose about $20 million of availability,” Doyle said.

Associated’s 2010 buyout by Hellman & Friedman was financed with $553.5 million of equity, the $730 million of notes and $73 million borrowed from the $225 million revolver, according to the regulatory filing. It also funded the deal, which included repayment of debt, with $45.9 million of cash from its balance sheet, the filing shows.

“Unfortunately, Associated’s business got away from them,” said Doyle. “They will not generate enough free cash flow to really reduce their borrowings under the revolver.”

To contact the reporter on this story: Christine Idzelis in New York at

To contact the editor responsible for this story: Faris Khan at

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