Hellman & Friedman $602M Bet On Housing Market Hits Setback

Recent credit downgrades to a portfolio company may indicate that Hellman & Friedman LLC may have jumped too soon into the building supply industry, which remains sluggish after the financial crisis that began in 2008.

The housing sector, typically a leader in economic recoveries, has struggled since the financial crisis. S&P said its economists are projecting housing starts of 740,000 in 2012, a 20 percent increase from 2011, but much of the growth will come in the multi-family segment, which typically carry lower margins for building products manufacturers.

The downgrades were issued this month on Associated Materials LLC, a maker of vinyl windows, siding, accessories and other exterior residential building products, after the company disclosed impairment charges of $164 million in a regulatory filing.

Standard & Poor’s Ratings Services cut its rating on Cuyahoga Falls, Ohio-based Associated Materials on April 26, to ’B-’ from ’B’, with a negative outlook. A ’B’ level rating means a company is vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments, according to S&P’s definition.

“The downgrade reflects our view that Associated Materials remains highly leveraged, with ’less-than-adequate’ liquidity, in our view,” said Standard & Poor’s credit analyst Megan Johnston in a prepared statement. The company’s net sales were roughly flat in 2011, at $1.2 billion, according to a filing it made at the end of March. But its adjusted EBITDA fell some 40 percent to $90 million, compared to the previous year, and debt grew because of increased borrowing, S&P reported. As a result, S&P calculated its leverage was greater than 10x as of Dec. 31, compared to 6.5x a year earlier.

That downgrade followed a move earlier in April by Moody’s Investors Service, which cut Associated Materials to ’Caa1’ from ’B3’. By Moody’s definition, a B rating is speculative investment subject to high credit risk, while a Caa level rating is for a company in poor standing and subject to very high credit risk.

The impairments mean that the company’s performance is weaker than Moody’s had anticipated when Hellman & Friedman bought the company in October 2010. In addition, Moody’s warned that Associated Materials’s credit metrics were likely to remain weak for the foreseeable future.

Hellman & Friedman, a San Francisco buyout shop founded in 1984, paid $1.3 billion to buy Associated Materials from previous sponsors Investcorp and Harvest Partners. The firm’s Web site said it made the investment from its fund Hellman & Friedman Capital Partners VI, a $8.4 billion vehicle that closed in April 2007, as Buyouts reported at the time.

The firm contributed $601.5 million in equity and financed $730 million in seven-year senior secured notes, as sister service Thomson Reuters Loan Pricing Corp. reported at the time. The notes priced to yield 9.125 percent, according to Thomson Reuters International  Financing Review

Associated Materials is one of two building products companies in the HFCP VI portfolio, according to Hellman & Friedman’s Web site. In 2008, the firm bought Goodman Global, a Houston-based maker of heating, ventilation and air conditioning for residential and light commercial use. The firm invests in a wide array of industries, typically writing checks of $300 million to $1 billion for companies in software, Internet and digital media, financial services, insurance, business and marketing services, industrial and energy, and health care industries.

Neither Hellman & Friedman nor Associated Materials responded by deadline to requests for comment.