GFF

How will this loss affect the company’s credit rating and borrowing capacity?

Created August 06, 2025 at 07:31 PM

Answer

A $120.1 million net loss (‑$2.65 per share) in the fiscal‑2025 Q3, driven largely by a $217.2 million after‑tax impairment charge on the Hun business, is a material negative result for Griffon Corporation (NYSE:GFF). While a single quarter’s performance does not, on its own, dictate a credit‑rating change, the size and nature of the loss give rating analysts and lenders several concrete reasons to reassess the company’s creditworthiness and borrowing capacity.

Below is a step‑by‑step look at the likely credit‑rating and borrowing‑capacity implications, together with the key factors that will shape the final outcome.

1. Immediate Credit‑Rating Considerations

Factor	Why It Matters	Potential Rating Impact
Magnitude of loss – $120.1 M (‑2.65 per share)	A loss of this size represents a ~19 % swing from the prior‑year Q3 profit (if any) and erodes equity.	Rating agencies (S&P, Moody’s, Fitch) may view this as a “downgrade‑triggering event” if it pushes profitability below the “stable” threshold.
Impairment charge – $217.2 M (‑4.69 per share)	The charge is non‑cash but signals that an asset (Hun) is now worth far less than its book value, raising questions about future cash‑flow generation and asset‑backed collateral.	Large, non‑recurring impairments often lead to a “negative outlook” or a downgrade because they suggest deteriorating business fundamentals.
Trend – 5 % YoY revenue decline (to $613.6 M)	Shrinking top‑line reduces the ability to offset fixed costs and service debt.	A downward revenue trend, especially when combined with a loss, can accelerate a downgrade if it continues.
Cash‑flow outlook – Not disclosed in the release	Credit analysts will dig into operating cash flow, free cash flow, and liquidity. If cash generation is weak, the rating impact is harsher.	Potential downgrade if cash‑flow coverage ratios fall below agency‑defined minima.
Debt covenant compliance – Unknown	A loss may breach leverage or interest‑coverage covenants in existing credit agreements.	Covenant breaches often trigger a rating downgrade or a “rating watch” by agencies.

Bottom‑line:

- Short‑term: The loss and impairment will most likely lead rating agencies to place a negative outlook on GFF or downgrade the rating by one notch (e.g., from BB+ to BB) if the loss pushes key credit metrics (EBITDA, interest‑coverage, leverage) below their thresholds.

- Long‑term: The final rating decision will depend on whether the loss is viewed as a one‑off event (impairment) or the start of a sustained earnings decline.

2. Borrowing Capacity – What Lenders Will Re‑Evaluate

2.1. Existing Debt Facilities

Item	Typical Covenant	How the Q3 loss could affect it
Leverage ratio (Total Debt / EBITDA)	Must stay below a set ceiling (e.g., 3.0x).	A net loss reduces EBITDA, raising the leverage ratio; could breach the covenant, prompting a technical default.
Interest‑coverage ratio (EBITDA / Interest)	Often required > 1.5x.	With negative EBITDA, the ratio collapses, potentially leading to a rating watch or re‑pricing of the debt.
Liquidity covenant (Current Ratio or Minimum Cash Balance)	Must maintain a minimum cash balance.	If cash burn is high, the covenant may be violated, forcing the lender to tighten the loan or demand additional collateral.

2.2. Future Credit Market Access

Consideration	Effect of Q3 Loss
Cost of capital	Higher perceived risk → lenders demand higher interest rates or larger spreads on any new debt.
Availability of term loans or revolving credit	Banks may reduce the size of available facilities or refuse to extend new credit until the company demonstrates a return to profitability.
Collateral requirements	The impairment of Hun reduces the asset base that can be pledged, prompting lenders to ask for additional security (e.g., liens on other subsidiaries, personal guarantees).
Equity‑linked financing	Investors may prefer convertible debt or preferred equity with higher coupon rates to compensate for the higher risk.

2.3. Potential Mitigating Actions

Action	How It Offsets the Negative Impact
Cost‑cutting & margin‑improvement plans	Demonstrates a credible path back to positive EBITDA, which can halt a rating downgrade.
Asset‑sale or non‑core divestitures	Generates cash, improves liquidity, and may lower leverage.
Refinancing existing debt (e.g., extending maturities, swapping high‑cost debt for lower‑cost instruments)	Reduces immediate cash‑flow pressure and can improve covenant ratios.
Capital‑raising (equity or mezzanine)	Strengthens balance‑sheet equity, providing a cushion for leverage ratios.
Transparent communication (e.g., a detailed earnings release, conference call)	Reduces uncertainty for rating agencies and lenders, potentially limiting the severity of any rating action.

3. What to Watch Over the Next 12‑Months

Metric	Why It Matters	Target/Red‑Flag
Adjusted EBITDA (excluding the impairment)	Shows underlying operating performance.	> $50 M would likely keep leverage under 3.0x (assuming $150 M debt).
Free cash flow	Determines ability to service debt and fund growth.	Positive cash flow each quarter is a strong signal.
Debt‑to‑Equity ratio	Indicates balance‑sheet leverage.	< 1.5x is generally acceptable for a BB‑rated company.
Interest‑coverage ratio	Directly tied to covenant compliance.	> 1.5x is a typical covenant floor.
Credit‑rating agency commentary	Provides the market’s view.	Any downgrade watch or negative outlook should be taken as a warning sign.
Management’s forward‑looking guidance	Sets expectations for earnings recovery.	Revenue growth > 2 % YoY and EBIT margin > 5 % would be reassuring.

4. Bottom‑Line Takeaway for Stakeholders

Credit rating: The Q3 loss, especially the large impairment, will most likely trigger a negative outlook or a one‑notch downgrade from rating agencies, at least in the short term. The magnitude of the downgrade will hinge on how the loss affects leverage, interest‑coverage, and cash‑flow metrics.
Borrowing capacity: Existing credit facilities may be re‑priced, reduced, or placed under tighter covenants. New debt will be more expensive and may require additional collateral or equity‑kick‑ins. The company’s ability to raise fresh capital will be constrained until it can demonstrate a credible return to profitability and cash‑flow generation.
Mitigation: Proactive cost‑reduction, asset‑sale, and clear communication of a turnaround plan can blunt the rating impact and preserve borrowing flexibility. If Griffon can post a positive adjusted EBITDA and improve liquidity in the next quarter(s), rating agencies may keep the downgrade limited to a “watch” rather than a full downgrade.

In short: The $120.1 M net loss and $217.2 M impairment will likely weaken Griffon’s credit profile and tighten its borrowing capacity in the near term, unless the company quickly demonstrates a return to cash‑positive operations and stabilizes its leverage ratios.