Moody's upgrades Boral's long-term rating to Baa2; outlook stable

Moody's upgrades Boral's long-term rating to Baa2; outlook stable
06 November 2015

Moody's Investors Service has upgraded Boral Limited's issuer rating and senior unsecured rating to Baa2 from Baa3. The outlook on this rating changed to stable from positive.

At the same time, Moody's has upgraded the commercial paper of Boral Limited, Boral Industries, Inc., Boral International Holdings, Inc. to P-2 from P-3 and upgraded the other short term rating of Boral Ltd to P-2 from P-3. Moody's also upgraded the senior unsecured MTN rating of Boral Limited to (P)Baa2 from (P)Baa3.

Rating's rationale
"The rating upgrade reflects the sustained improvement in Boral's credit profile over the last two fiscal years", says Maurice O'Connell, a Moody's Vice President and Senior Credit Officer.

"In particular, we have seen a strengthening in Boral's operating profile, supported by the entrenched turnaround in the performance of its two financially weakest divisions, Boral USA and Boral Building Products," adds O'Connell.

"Support from improved levels of housing demand in the US and Australia – as well as meaningful cost reduction initiatives at the company over the last 2-3 fiscal years – has improved underlying earnings," says O'Connell.

At the same time, Moody's notes that Boral's improved debt position, following the receipt of around $500m of proceeds from the sale of its 50 per cent interest in Boral Gypsum in March 2014, has also been maintained despite a share buyback.

Accordingly, its financial metrics have outperformed the parameters set for the rating.

For FY2015 (year ending 30 June 2015) Boral's debt/EBITDA was around 2.5x, while EBIT/interest improved was around 3.6x in FY2015.

Moody's also notes that Boral's gearing, which it defines as net debt/net debt + equity, totalled 19 per cent at end-June 2015, which is below its targeted range of 20-40 per cent.

Boral's financial leverage could increase if it undertakes shareholder-friendly capital management activities, or makes debt-funded acquisitions. If Boral was to move to the mid range of its gearing target by way of acquisition, Moody's estimates that adjusted debt/EBITDA would remain below 3 times.

Moody's expects that Boral's financial leverage -- measured as adjusted debt/EBITDA, -- will be in the mid-2.0 times range and that EBIT/interest cover will be close to 4 times over the next 12-18 months. Actual financial leverage will, however, be dependent on what Boral undertakes in terms of bolt-on acquisitions or capital management initiatives.

A key driver for the rating upgrade is the improvement in the Boral US division.The US operations, which have exerted significant pressure on Boral's operating profile over the past four years, turned profitable in FY2015, delivering an EBIT of around AUD6 million.

Moody's believes that Boral USA will continue to deliver improved profitability. At the same time, Australian residential building activity has remained robust with total annual housing starts at around 220,000 in the 12 months to the end of June 2015. While Moody's considers that this may represent a peak, housing activity will remain solid.

Boral's rating is not expected to be upgraded in the near term, given the cyclicality inherent in the building materials industry and management's gearing target.

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