S&P Downgrades Building Systems

Correcting and replacing. The previous post had incorrectly listed the ticker for Navigant Consulting (NCI - Analyst Report). The downgrade specifically is for NCI Building Systems Inc. (NCS - Analyst Report), not Navigant Consulting. A correct version follows.

Standard & Poor's Ratings Services (S&P) downgraded its rating on NCI Building Systems Inc. (NCS - Analyst Report) to non-investment grade of "CC" from "CCC+."

Last week, NCS announced that it has entered into a definitive agreement with Clayton, Dubilier & Rice Fund VIII, L.P. ("the CD&R Fund"), under which the CD&R Fund will invest $250 million in the company by purchasing newly issued convertible participating preferred shares.

The company said that this is part of a comprehensive solution to address NCS's significant near-term debt repayment obligations, reduce debt by $323 million and position the company for future growth. This transaction is expected to close by the end of the fiscal year.

This preferred stock investment is conditional upon the completion of the following:  

• The company has commenced a process to amend its existing $293 million term loan, which will include the repayment of approximately $143 million and a modification of the terms and maturity of the remaining $150 million of debt.  
• The company will launch an exchange offer to retire its existing convertible notes. For each $1,000 convertible note, the company will offer a combination of $500 in cash and 125 shares of NCS common stock.
• The company is in the final stages of concluding an agreement for a $125 million asset based loan facility, which is not expected to be drawn at closing.  

S&P pointed out that if 100% of lenders and 95% of note holders do not agree to the revision and note exchange, respectively, NCS said it would proceed regardless in a prepackaged Chapter 11 bankruptcy filing.

Therefore the rating agency views this exchange as equivalent to a restructuring and default, since failure to complete the exchange on stated terms will likely result in a bankruptcy filing. Shares of NCS fell after this announcement.