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Good profitability provides an offset to Foundation's leveraged capital structure. Moody's forecasts adjusted EBITDA margin in the range of 7.5% - 10% for 2021. Profitability will benefit from higher volumes from growth in end markets and the resulting operating leverage from that growth. Moody's projects pro forma revenue will grow to $3.1 billion for 2021 from $3.0 billion for 2020. Moody's also calculates interest coverage, measured as EBITA-to-interest expense, will be around 2.5x in 2021, which is reasonable given the company's considerable interest expense.

Domestic construction end markets, the driver of Foundation's revenue, are showing resiliency during the coronavirus outbreak and resulting economic concerns. Non-residential construction (combined new construction and repair and remodeling activity), representing approximately two-thirds of pro forma revenue, is exhibiting stability with growth opportunities. New home construction accounts for about one-third of Foundation's pro forma revenue. Moody's has a positive outlook for the US Homebuilding sector with good growth expected. As a national distributor with diverse product offerings, Foundation should benefit from high levels of spending in these end markets.

Governance characteristics we consider in Foundation's credit profile include an aggressive financial strategy, evidenced by high leverage. Moody's expects that the company will pursue bolt-on acquisitions to build scale, using cash flow as the primary source of funding. However, dividends are an ongoing possibility. The Board of Directors has not been finalized. Moody's believes there will be eight directors of whom four will be independent. This differs positively from other private equity owned companies in which the sponsor has majority control. However, American Securities, the private equity sponsor, will have significant influence regarding Foundation's financial policies. There is also risk associated with the transfer of ownership, which could result in a financial strategy that differs from previous experience.

Also, Moody's forecasts that Foundation will have good liquidity over the next two years. Robust cash flow, substantial revolver availability and no near-term maturities provide more than ample financial flexibility for Foundation to integrate Beacon's interior business, for future bolt on acquisitions and to contend with ongoing competition.

The stable outlook reflects Moody's expectation that Foundation's leverage will trend below 6.0x over the next two years. A good liquidity profile and Moody's expectation that Foundation will successfully integrate Beacon's interior business without impacting operations further supports the stable outlook.

The B2 rating assigned to Foundation's senior secured term loan, the same rating as the Corporate Family Rating, results from its subordination to the company's asset based revolving credit facility but priority claim relative to the company's senior unsecured notes. The term loan has a first lien on substantially all noncurrent assets and a second lien on assets securing the company's asset based revolving credit facility (ABL priority collateral).

The Caa1 rating assigned to the company's senior unsecured notes due 2029, two notches below the Corporate Family Rating, results from their subordination to the company's considerable amount of secured debt.

The senior secured term loan is expected to contain certain covenant flexibility for transactions that can adversely affect creditors. The documents governing the company's senior secured term loan gives Foundation the ability to incur incremental indebtedness with a free and clear basket not to exceed 100% LTM consolidated EBITDA, plus any unused amounts under the general debt basket incurred as incremental, plus additional amounts so long as after closing: first lien net leverage ratio does not exceed closing date first lien net leverage by 0.25x (for pari passu indebtedness); either, (i) senior secured net leverage does not exceed closing date senior secured net leverage by 1.25x, or (ii) interest coverage is not less than 2.00x (for junior secured indebtedness); and, either (i) total net leverage does not exceed closing date total net leverage by 1.25x or (ii) interest coverage is not less than 2.00x. Alternatively, all ratio tests may be satisfied so long as leverage does not increase or interest coverage does not decrease on a pro forma basis if incurred in connection with a permitted acquisition or investment. Collateral leakage is permitted through the transfer of assets to unrestricted subsidiaries, subject to carve-out capacity; subject to limitations on dispositions or investments of any intellectual property that, in the good faith determination of the borrower, is material to the operation of the business taken as a whole. Only wholly-owned subsidiaries must provide guarantees, raising the risk of potential guarantee release; partial dividends of ownership interests could jeopardize guarantees. Foundation's obligation to prepay loans with the net proceeds of asset sales steps down to 50% and 0% if pro forma first lien net leverage is reduced by 0.50x ad 1.00x, respectively.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Factors that could lead to an upgrade:

» Debt-to-LTM EBITDA approaching 5.0x

» EBITA-to-interest expense is maintained near 2.5x

» Preservation of good liquidity

Factors that could lead to a downgrade:

» Debt-to-LTM EBITDA is sustained above 6.0x

» The company's liquidity profile deteriorates

» Aggressive acquisition or shareholder initiatives

Foundation Building Materials, Inc., headquartered in Santa Ana, California, is a national building materials distributor of wallboard, suspended ceilings systems, metal framing, insulation and other material. American Securities LLC, through its affiliates, will be the owner of Foundation.

The principal methodology used in these ratings was Distribution & Supply Chain Services Industry published in June 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1121974. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Peter Doyle Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Dean Diaz Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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