SRS Distribution Inc.

Our negative outlook on SRS indicates our view that the coronavirus-related recession could lead to a prolonged deferment of roof replacement activity as well as lower demand from homebuilders. This could cause the company's revenue and earnings to weaken by more than we expect under our base-case scenario and lead it to maintain debt leverage and coverage metrics that are weak for the current rating. We may lower our ratings on SRS over the next 12 months if: Its EBITDA declines by over 10% from the prior year's level (and nearly 20% from previous expected levels), causing it to sustain debt to EBITDA of more than 7x while its interest coverage falls below 2x with little expectation of a quick

...While the company reduced its leverage by nearly two turns to 6.3x in 2019, we expect its leverage to remain above 6.0x in 2020 as it faces recessionary headwinds. SRS Distribution Inc. reported debt leverage of 6.4x for its fiscal year ended Oct. 31, 2019, down from 8.8x the prior year, as increased sales and a reduction in its restructuring charges boosted its EBITDA to record levels. While we expect continued strong growth in 2020 from the company's recent and anticipated acquisitions, the U.S. recession stemming from the ongoing coronavirus pandemic will likely blunt its sales growth as consumers pull back on big ticket repairs, like roof replacements. We view roof replacements, which account for the majority (75%-80%) of SRS' business, to be non-discretionary and a function of roof age and damage. However, consumers can defer replacement by undertaking smaller repair jobs. The implementation of social distancing guidelines has also made it more difficult for roofers to meet with potential...

Full Report