Associated Materials Adds Debt For Acquistion

Moody's Investors Service has assigned Associated Materials' new debt package the same rating as the company's existing loan, despite the slightly increasing leverage. The company is adding to its term loan by $113.5 million and its revolver by $30 million to back its acquisition of Gentek Holdings for $118 million in cash. Currently, Associated Materials has a $40 million revolver, $76.5 million outstanding on its "B" loan and $165 million of 93/4% senior subordinated notes. With the increased debt for the Gentek transaction, Moody's expects that total leverage will rise to 4.2 times from 3.75 times. But Moody's anticipates that the company will use its free cash flow, which has been solidly positive since 2000, to pay down the bank lines. UBS and Credit Suisse First Boston are shopping the deal (see story, page 3).

Moody's current bank debt rating takes into account the company's leveraged state due to its 2002 buyout by Harvest Partners with management and the resulting recapitalization. At that time, pro forma debt rose from $75 million to $290 million and corresponding total debt-to-adjusted EBITDA increased to 4.5 times from 1.2 times. Moody's rating also considers the company's sizeable goodwill and negative tangible net worth, as well as the possibility that future acquisitions will be funded with additional debt.

Factors supporting the credit include steady growth in sales and earnings over the last four years. The company has been able to produce compound annual growth rates of 14.5% for sales and 13.8% for EBITDA over this time period. Moreover, Associated Materials is able to achieve a competitive edge through its 91 captive supply centers and obtains 75% of its revenues from this national distribution system.

As a manufacturer and distributor of exterior residential products including vinyl siding, Associated Materials is subject to the historically volatile price for its major raw material--vinyl resin, according to Moody's. Associated Materials also competes with the manufacturers of other exterior siding products and is subject to the cyclicality of the homebuilding and remodeling industries. Keith LaVanway, Associated Materials' cfo, did not return calls.