global building materials industry

Rating Methodology

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July 2006

Global Building Materials Industry

Summary

This rating methodology sets forth the key analytical factors that contribute to Moody’s ratings of companies in theglobal building materials industry. Its primary goal is to help issuers, investors and other participants in the industryunderstand how Moody’s assesses risk in building materials and to enable our constituents to be able to gauge acompany’s ratings. This methodology is not an exhaustive treatment of all factors reflected in Moody’s ratings, but itshould enable the reader to understand the key considerations and financial ratios used by Moody’s in the final ratingdetermination.

For purposes of this methodology, we have defined building materials producers as those companies involved inthe production of basic building materials, namely cement, concrete, aggregates, gypsum, bricks and roof tiles.Although the universe consists of issuers of varying size and focused on different customer industries, rated issuers doexhibit similar business fundamentals and face many common credit considerations. The fundamental business driversaffecting building materials companies tend to be highly correlated to construction activity, which is itself often aderivative of regional economic growth.

This methodology focuses on the key operational and financial aspects that Moody’s believes to be the criticalcornerstones of a company's performance and its ability to remain competitive and service its debt obligations.

There are five key factors that Moody’s uses to examine credit risk and assign ratings in the building materialssector, with sub-factors that form important building blocks for many of the categories. These factors, which will beclosely examined in this report, are as follows:1. Business Profile2. Size and Stability3. Cost Position and Profitability4. Financial Management Strategy5. Financial Strength

A number of other generic factors such as quality of management and corporate governance, although difficult toquantify, can also have a meaningful impact on ratings assigned to building materials companies. However, thesefactors, which are covered in the section “Other Considerations” are not deemed specific to the sector, but rather areapplied across the corporate finance franchise.

Highlights of this report include:• An overview of the key risk factors for the global building materials industry• A description of the rating methodology and the five primary factors (comprising 13 sub-factors) that we believe

drive credit quality in this sector• Application of the rating framework to 12 representative building materials producers• Discussion of “outliers” – companies whose rating for a specific factor differs significantly from what its actual

rating would otherwise imply• An explanation of other rating considerations• A summary of our results and their weightings

In an effort to promote transparency, we have also provided a detailed rating grid, which maps each key ratingfactor, including sub-factors and financial metrics, to specific letter-ratings. The purpose of this rating grid is toprovide issuers, investors, and other participants with a reference tool when comparing credit profiles within the build-ing materials sector. We would nonetheless caution that a company will not necessarily match exactly each letter-ratingdimension of the grid; the rating output of the grid will therefore be a balance of all the factors that have been identi-fied. Further it must be recognized that ratings are prospective opinions on future relative credit risk. Event risk, e.g.acquisitions that alter a firm’s capital structure and/or liquidity profile and, most importantly, expectations on forward-looking performance and cash flows continue to be major influences on Moody’s ratings.

Basic Building Materials: Overview of the Global Rated Universe

For purposes of this methodology, we have defined building materials producers as those companies involved in theproduction of basic building materials, namely cement, concrete, aggregates, gypsum, bricks and roof tiles.

Moody’s publicly rates 25 basic building materials companies globally with an aggregate of nearly $65 billion oftotal debt.

2 Moody’s Rating Methodology

Geographically,• 36% of the rated issuers are based in Europe,• 48% in the Americas, and• 16% in Asia Pacific.40% of the universe is rated below investment grade.

Global Building Materials CompaniesAs per June 2006

CompanyMoody’s LT

Rating Outlook Country

Revenues as per Latest FY End

in US $ bn****

Gross Debt as per Latest FY End

in US $ bn****

Vulcan Material A1 stable USA 2.9 0.6Martin Marietta Materials A3 stable USA 2.0 0.7Rinker Group A3 stable Australia 5.1 0.7Boral Baa1 stable Australia 3.3 1.1CRH* Baa1 stable Ireland 18.0 6.4Hanson Baa1 stable UK 6.8 3.8Saint Gobain Baa1 stable France 43.7 10.6Ciments Francais Baa2 stable France 4.5 1.5Imerys Baa2 stable France 3.8 1.7Lafarge** Baa2 negative France 19.9 11.2Wienerberger Baa2 stable Austria 2.4 1.3Cemex Baa3 stable Mexico 14.9 9.2KCC Baa3 positive Korea 2.5 0.8Taiheiyo Baa3 stable Japan 8.2 6.2USG Baa3 stable USA 5.1 1.0Dyckerhoff*** Ba1 positive Germany 1.7 0.6HeidelbergCement Ba1 positive Germany 9.7 4.9Camargo Correa Cimentos Ba3 stable Brazil 0.2 0.5Texas Industries Ba3 stable USA 2.0 0.8St. Marys Cement Ba3 stable Canada 0.6 0.2Headwaters B1 stable USA 1.1 0.7U.S. Concrete B1 stable USA 0.6 0.2Loma Negra B2 stable Argentina 0.2 0.2Ready Mixed Concrete B2 stable USA 0.2 0.2CP Cimento Caa2 negative Brazil 0.2 0.2

* incl. MMI Products** incl. Lafarge North America and Blue Circle*** incl. Lone Star**** Note: Except otherwise stated as per 12/2005, exceptions are: Rinker 03/3006, Boral 06/2005, Taiheiyo 03/2005, Loma Negra 08/2005, KCC 12/2004

Rating Distribution

0

1

2

3

4

5

Aaa-Aa3

A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa-C

Rating

Num

ber o

f Iss

uers

Moody’s Rating Methodology 3

The global investment grade ratings are clustered in the mid-Baa range and the speculative grade ratings aregathered around the B1 rating level.

The rating grids used for illustrative purposes in this methodology cover 12 of the rated building material compa-nies, which were selected to represent a wide range of credit ratings, size, operating characteristics, and geographiclocations. The representative companies listed below comprise roughly $43 billion, or 65%, of the total debt of issuersin the building materials industry rated by Moody’s.

Industry Challenges and Rating Drivers

Companies in the basic building materials industry share a number of key features that have an impact on their creditprofiles:I. In general, building materials is a cyclical industry.

Cycles invariably follow the patterns of the building materials producers end markets – namely, the construc-tion and infrastructure industries. However, these cycles are usually limited to regional, if not local, markets.Price wars, as currently experienced in Brazil or in the recent past in Germany, can add to local economicdownturns. Companies that are diversified geographically and in terms of their products are usually expected toweather regional downturns with the help of good performance in other regions. Therefore, Moody’s expectsgeographically diversified building materials companies to typically generate more stable cash flows than thosethat lack such diversification.

II. Building materials have a low value-to-weight ratio.The low value-to-weight ratio prevents companies in this market from competing globally. For example, thetransport of hollow bricks is only considered economical if the distance is below 200 km (around 120 miles)from the plant. Local production, a well-spread asset base and the application of a best practice approach arekeys for success. Pricing is therefore negotiated on a local rather than on a global basis. The shipment ofcement over large distances is only economical, although far less profitable if the plant is close to a sea portwhere it can be loaded in large quantities.

III. Companies typically benefit from flexibility in their requirements of capital expenditure for maintaining theirproduction base, which allows them to adapt to changes in regional or market characteristics.The technology to produce building materials is well established, notwithstanding the need to upgrade thefacilities following regulatory changes, such as the introduction of the CO2 emission trading scheme. Mainte-nance capex can be planned flexibly and is in the short to medium term generally lower than the depreciationcharge for the assets. In addition, general overhauls of single cement plants, which are most costly, can beplanned a long time ahead and the lifetime of a cement plant can span over a couple of decades without the needfor major investments. In the event of a downturn in specific markets, building materials companies can there-fore offset lower operating cash flows with a reduction in capital expenditures.

Representative Sample of Building Materials CompaniesAs per June 2006

CompanyMoody’s LT Rating Outlook Model Rating Country

Rinker Group A3 stable A AustraliaMartin Marietta Materials A3 stable Baa USABoral Baa1 stable Baa AustraliaCRH Baa1 stable A IrelandLafarge Baa2 negative Baa FranceWienerberger Baa2 stable Baa AustriaCemex Baa3 stable Baa MexicoTaiheiyo Baa3 stable Ba JapanHeidelbergCement Ba1 positive Baa GermanyCamargo Correa Cimentos Ba3 stable Ba BrazilSt. Marys Cement Ba3 stable Ba CanadaU.S. Concrete B1 stable B USA


IV. GDP growth is a primary driver of organic revenue growth, and construction and refurbishment activity inparticular regions or markets will therefore influence top-line growth rates.GDP growth in the mature markets of Western Europe and North America is expected to be comparably lowand, as a result, companies in the industry will invariably seek growth through investments in emerging andfast-growing markets or via further consolidation in established markets and through vertical integration. Thefunding of external growth is therefore a key consideration when analyzing building materials companies.

V. Barriers to entry are often very high given the limited availability of raw materials, such as pits and quarries, andthe high initial cost of entering markets, e.g. building a plant in the case of the cement market and establishingefficient distribution channels.In mature countries, most of the rights and permits for raw materials have already been assigned. In addition,the high cost of building production facilities, especially in the cement and brick markets, adds further barriersto entry. In consolidated markets, it is also difficult for new market entrants to gain market share as establishedplayers will adapt their strategies to defend market positions, which can in the short term impact all players inthe market, as noted in the Brazilian cement market since 2005.The aggregates industry in mature markets is still highly fragmented, with many small companies operatingonly a limited number of quarries in a specific region, thereby making it less difficult for companies to enternew markets via smaller bolt-on acquisitions. Therefore, it is considered that there is still room for furtherconsolidation and expansion for the leading building materials companies. In contrast, the cement industry ismostly consolidated, with only a few market participants operating. In cement, expansion of global players istherefore expected to come from vertical integration or from an extension of geographic reach into emergingmarkets, essentially through acquisitions.

VI. The production of building materials is energy-intensive. Increases in the cost of energy can have a materialimpact on the performance of profitability and cash flow.Energy constitutes a sizeable proportion of the operating costs of certain segments in the building materialsindustry. Generally, producers of building materials hedge a large part of their energy bill; however, the matu-rity of hedging instruments, which have provided the companies with comparatively low energy prices, isexpected to have a negative impact going forward. In addition, companies are lowering energy bills by usingalternative fuels, such as used tires and waste.

VII.In addition, ongoing consolidation, liquid balance sheets and stable cash flows are likely to pose an increased riskof large debt-financed acquisitions, e.g. Saint-Gobain’s takeover of BPB. Specific players are also likely to faceshareholder pressure to exploit cash sources, notably through share buybacks or increased dividend payments.

Key Issues Looking Into the Next Decade

Countries with high population growth will drive future developmentConsumption of building materials is strongly affected by two factors: population growth and the economicdevelopment of a country based upon its GDP per capita. The annual growth of the world population was 1.5%between 1985 and 2005. The highest growth rate was recorded in Africa (+2.5%) and the lowest growth (-0.1%) wasrecorded in Eastern Europe. In addition to having the highest rates of population growth, emerging markets and alsosome areas in the United States (e.g. Florida, Texas, California) are characterized by strong growth in demand for allsorts of building materials. Companies operating in these areas are considered to be in an advantageous position asregards demand/supply and their ratings could therefore benefit from activities in these growth regions in the longerterm. Companies with no or only limited exposure to the high-growth areas may be faced with weaker cash flowgeneration ability, potentially resulting in lower ratings over the longer term..

Sustainability of high energy pricesAs the use of energy is a critical factor in the manufacturing process of building materials, such as cement, aggregatesor bricks, these will continue to play a major role for the companies involved in this sector. Sustained high energyprices will put pressure on the company's margins over time in the absence of any pass-through. Reducing energyconsumption, managing energy prices via hedging instruments and successfully passing on increased input costs areconsidered to be the key challenges in the coming years. A weaker economic environment, coupled with increasinginput prices, might lead to substantial pressure on margins because the companies might not be able to pass on theincrease in costs. Therefore cash flows would be weaker and as a consequence there would be pressure on the ratings aswell.


China and India – High volumes, low prices, fragmented marketChina, followed by India, is by far the largest building materials market in the world, accounting for roughly 44% ofglobal cement production. If cement consumption is taken as an indicator of the growth and potential of the buildingmaterials industry, China will likely become an increasing factor in the global supply/demand characteristics of thebuilding materials industry. Moody’s recognizes that the Chinese market remains highly fragmented with over 5,200independent cement manufacturers, each with an average annual capacity of only 200,000 tons and some inefficientproduction technologies. Comparing it to the United States market, where the top 5 producers capture over anestimated 60% of the market, China’s top 10 producers only account for 15% of total domestic production. Moody’salso recognizes that China’s Economic Operation Department of the National Development and Reform Commissionis currently encouraging consolidation in the industry and aims to boost national cement output by 25% over the nextfive years, as strong growth is expected to continue.

The fragmentation of the market currently leads to high price volatility and – on average – very low prices.Coupled with high energy costs, this leads to very low margins.

Despite these challenging conditions, Moody’s expects global building materials companies to more activelyattempt to penetrate the Chinese market, and remains cautious about the global implications of potential excess capacityin China following the 2008 Olympic Games.

Debt-financed industry consolidationWe expect continued consolidation in the industry, driven primarily by the compulsion to increase revenues at a rate inexcess of average GDP growth and to further consolidate fragmented markets, especially in the areas of concrete, aggre-gates, bricks and roof tiles. Moody’s anticipates that the trend of vertical integration by globally integrated buildingmaterials companies will accelerate over the intermediate term. Event risk, particularly with regard to acquisitions, willcontinue to be a rating consideration. In the methodology we capture this effect with the sales volatility figure: if adramatic increase in revenues results from aggressive external growth, this could indicate increased volatility and there-fore a lower rating category may be warranted.

CO2 emission reductionThe greenhouse gas Emissions Trading Scheme (ETS) that came into operation at the beginning of 2005 was devisedto help developed countries achieve the emission reduction targets laid out in the Kyoto protocol. Emission certificateshave been allocated to the companies for free. The scheme covers a total of more than 12,000 installations in the EU’s25 member states. The building materials sector has been identified in the first phase of ETS as one of the heaviestemitters of carbon dioxide (which also include electricity generation, heat and steam production, mineral oil refineries,coke ovens, iron and steel plants and factories manufacturing pulp and paper).

So far, building materials producers in general appear to have been allocated sufficient certificates to continueproduction at current levels and are additionally able to sell small quantities of excess certificates.

The current scheme terminates in 2008, but the details of the new scheme have yet to be agreed. The availabilityof emission certificates will most likely be reduced, and there is the possibility that the companies will have to pay forthe initial allocation of the certificates. It is therefore important for companies with activities in mature countries toincreasingly use alternative fuels, such as waste, old tires or pet coke.


In the United States, although emission certificates are not applicable, emission levels remain relevant to capitalspending initiatives in the building materials industry, particularly to cement companies. The ability to secure permitsfor additional capacity is principally linked to an issuer’s ability to reduce or maintain current emission levels in a givenregion, typically by implementing technological improvements on aging equipment. As such, Moody’s does not envi-sion notable amounts of additional cement capacity coming online in the United States after currently planned capitalspending projects are completed through 2008 – 2009. Any additional demand exceeding the production capacity isexpected to be met via imports from other parts of the world. Already today around 30% of the US’s cement consump-tion is imported.

In This Methodology

Moody’s approach to rating companies in the building materials industry incorporates the following steps:

1. IDENTIFICATION OF THE KEY RATING FACTORSThese are the key factors that Moody’s considers to be major drivers in determining a rating for a company in theglobal building materials industry:1 Business Profile2 Size and Stability3 Cost Position and Profitability4 Financial Management Strategy5 Financial Strength

Each of the five factors contains between two and three sub-factors, which comprise the components viewed asmost important in assessing the credit quality of building materials issuers. In total, the five categories include 13 sub-factors. Any change in one or more of these factors is likely to influence the overall business and financial risk assess-ment incorporated in a rating. The factor may either be: • Quantitative: Financial assessments that can be derived from publicly available data (e.g. operating margin,

revenues). The ten quantitative factors considered in this methodology are assigned a total weight of 80%.or

• Qualitative: An assessment based on rankings estimated by Moody’s, or broader quantitative measures defined byMoody’s in this methodology (e.g. market position, number of countries in which a company is active). 20% of theoverall weight is allocated over the three qualitative sub-factors.In addition to the five major factors discussed in this report, Moody’s considers other qualitative factors which

either cannot be quantified or cannot be quantified in a meaningful manner. These factors, however, may representimportant and in some cases overriding considerations. These factors are explained in the “Other Considerations”section.

2. MEASUREMENT OF THE FIVE KEY RATING FACTORSMoody’s practice for measuring ratios is to use the past two or three years’ actual results along with Moody’s expec-tation for the next two or three years’ results, and to consider the average as well as the high and low points. This givesus a view of a company’s ability to perform in both high- and low-price environments. For illustrative purposes in thismethodology, we have used five years of historical data only for each of the sample companies as a proxy for variousprice environments that Moody’s would consider in ratings deliberations.

However, some of the companies covered in this methodology do not have a five-year history - namely, Rinker(which was divested from CSR four years ago), Martin Marietta, St. Marys Concrete and US Concrete. We havetherefore used three- or four-year figures, as available.

Certain of the metrics we use (such as the volatility of Revenues, Operating Margin or Interest Coverage) arebased on a volatility measure covering the past five years’ results, while other measures (such as Debt to Book Capitali-zation) are taken at a fixed point in time, which is usually the most recent year-end for which the data is available.Except where otherwise noted, financial figures used are adjusted based on Moody’s standard analytical adjustments1.We identify throughout the report the basis of measurement for each metric.

1. Please refer to Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-Financial Corporations Part I and II.


Please note that for company-specific results listed in this publication we rely solely on public information,whereas actual rating decisions will also incorporate non-public data as applicable.

3. MAPPING FACTORS TO THE RATING CATEGORIESThe methodology sets forth what Moody's believes to be appropriate ranges for broad rating categories from Aaa-Aato Caa-C for the sub-factors. The ranges represent, on average, our expectations for each rating category. After identi-fying the measurements and ranges for each factor, the outcomes for each of the 13 sub-factors are mapped to aMoody’s rating category (i.e. Aaa, Aa, A, Baa, Ba, B and Caa).

4. DETERMINING THE FINAL RATINGTo determine an overall rating, each of the 13 assigned sub-factor ratings is converted into a numeric value based onthe following scale:

At the sub-factor level, the lowest value is assigned to an implied Aaa-Aa rating, for which a 2 is assigned, while thehighest value is assigned to a Caa-C rating (19). In general, the numeric value for each rating category, such as the 6 forthe “A” category derives from the average of the numeric values applied for each notch within this rating category.Each sub-factor’s numeric value is multiplied by an assigned weight (refer to the table below), and then summed. Forinformation purposes, the table below also shows sub-totals for the summation that show how much weight is given toeach broad rating category.

The total is then mapped to the table below, and an overall rating is assigned based on where the score falls in therange. Since the composite rating indication is presented at the alpha-numeric rating level while sub-factor rating indi-cations are presented at only the alpha level, the table shows outcome ranges for both presentation formats.

Conversion of Sub-Factor Ratings Into Numeric ValueBased on Rating Categories

Aaa-Aa2

A6

Baa9

Ba12

B15

Caa-C19

Based on Notches

Aaa Aa1 Aa2 Aa3 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 B1 B2 B3 Caa1 Caa2 Caa3 Ca C1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21

Factors Sub-factors Weighting

Cumulative Sub-Factor Weighting

Factor 1: Business Profile Product Line Diversity 5.0% 20%Geographic Diversity 10.0%Market Position 5.0%

Factor 2: Size and Stability Revenues 10.0% 20%Revenue Stability 10.0%

Factor 3: Cost Position and Profitability Operating Margin 6.67% 20%Operating Margin Volatility 6.67%ROAA 6.67%

Factor 4: Management Strategy Debt / Capitalization 10.0% 20%Debt / EBITDA 10.0%

Factor 5: Financial Strength EBIT / Interest 6.67% 20%RCF / Net Debt 6.67%FCF / Gross Debt 6.67%

Total 100.0% 100%


The entire array of scores and mappings for each of the companies is shown in Appendix 1. Moody's recognizes there are instances in which consolidated financial information may not capture a complete

picture of credit risk. This can occur for many reasons, the most common of which relates to recently completed orpending mergers that are not yet reflected in reported historical data, reorganization activity, and the prospectivenature of a given rating. These instances are identified and explained as part of the overall rating mapping process andassessment.

5. OUTLIER DISCUSSIONWe recognize that not every factor will map to the actual rating level and that the rating therefore represents an overallblend of the key factors. Any given company may perform higher or lower on a specific factor than its actual ratinglevel. We highlight those companies whose factor mapping is two or more rating categories higher or lower than itsrating and offer a discussion of the general reasons for outliers within a given factor. This document provides discus-sion of the general reasons for such outliers for each rating sub-factor.

The Five Key Rating Factors

RATING FACTOR 1: BUSINESS PROFILE

Why it mattersBusiness Profile is an important indicator of credit quality. The construction markets are characterized by high, butlocal or regional, cyclicality. A positive business profile, demonstrated by geographical and/or product diversificationand strong market position in certain markets, helps to offset local or regional market weaknesses with strong marketssomewhere else. Diversification therefore is expected to lead to stability in cash flow and margins despite the generallycyclical patterns in the construction industry. There are three sub-factors which aggregate into a single score, which isthen mapped to a specific rating.

DiversificationThe first two sub-factors focus on geographical and product diversity, as diversity is deemed to provide a platformfrom which a company can stabilize sales and protect earnings by offsetting variations in demand in a given product ormarket. As most of the end customers of building materials producers are companies in the overall construction andinfrastructure industry, diversification in terms of end customer industry cannot typically be found.

Indicated Total RatingAggregated Weighted Total Factor Score"

Indicated Sub-Factor Rating

Factor or Sub-Factor Score

Aaa < 1.50 Aaa - Aa 1.00 - 4.49Aa1 1.50 - 2.49Aa2 2.50 - 3.49 Aa3 3.50 - 4.49A1 4.50 - 5.49 A 4.50 - 7.49A2 5.50 - 6.49A3 6.50 -7.49 Baa1 7.50 - 8.49 Baa 7.50 - 10.49Baa2 8.50 - 9.49Baa3 9.50 - 10.49 Ba1 10.50 - 11.49 Ba 10.50- 13.49Ba2 11.50 - 12.49Ba3 12.50 - 13.49 B1 13.50 - 14.49 B 13.50- 16.49B2 14.50 - 15.49B3 15.50 - 16.49 Caa1 16.50 - 17.49 Caa - C 16.50- 21.49Caa2 17.50 - 18.49Caa3 18.50 - 19.49 Ca 19.50 - 20.49C 20.50 - 21.00


Issuers that score highly in this sub-category are invariably those issuers with sizeable revenues such as CRH andLafarge.• Geographical diversification is viewed a positive factor because it reduces: (i) the company’s vulnerability to the

vagaries of a single region, (ii) the impact of economic cyclicality in individual regions, and (iii) the impact ofregional regulatory, environmental, product liability or safety (e.g. asbestos) issues.

• Product line diversification balances and offsets exposure to the volatility of demand and price competition inparticular industries and mitigates weaknesses in any one market or product line. However, the effectiveness ofthis strategy has to be carefully analyzed with regard to the correlation of the individual segments. In manyinstances, orders for various types of equipment used in different industries tend to coincide, reflecting the generalinvestment climate in a country rather than segment-specific trends.The prime benefits of a large and diversified business mix should be captured by low revenue volatility and solid

profit margins. Effectively diversified companies should exhibit a greater degree of revenue consistency and scaleshould bring operating efficiencies, normally reflected in higher profit margins. Revenue volatility is addressed inRating Factor 2; operating efficiency and profitability are discussed in Rating Factor 3.

Market PositionA strong competitive position in a regional market implies more robust pricing power and ability to produce sustain-able future revenues and cash flows. For instance, those regional markets that are characterized by low competitivethreats are viewed as positive, whilst those markets with high competition are deemed as weak given a player’s limitedpricing power.

How We Measure itThe overall category score is made up of three criteria. For each of the three criteria we assign a discrete numericalvalue (a 2, 4, 6 or 8) based on the following qualitative assessment:

Product Line Diversity (25% of overall score): We assign the numerical value taking into consideration a company’snumber of product lines, their size and profitability. A company which has more than three well balanced profitableproduct lines, such as Lafarge, will be assigned an 8. Geographic Diversity (50% of overall score): As with Product Line Diversity, we assign a score of 2, 4, 6 or 8 to acompany.

As a first step we analyze the number of countries in which the company operates. For each country we assign“country points”. As shown below, each country can account for 1 to 4 country points depending on the annual cementconsumption, which we take as a proxy for the size of the market for building materials.

Numerical Value Assigned

% of Overall Score 2 4 6 8

Product Line Diversity 25% Majority of Cash Flow is generated from one business line

More than one product line, but heavily reliant on one core segment

More than three product lines, which vary in size and profitability

More than three well balanced profitable product lines

Geographic Diversity 50% < 3 country points* 3 - 7 country points 8 - 12 country points > 12 country pointsMarket Position 25% Regional or niche

playerAmong the top five players in only two of its core markets**

Among the top five players in at least three of its core markets

Among the top three players in at least three of its core markets

* for calculation of country points, please refer to the following table** Core market = core geographic markets in terms of revenue recognition


As a second step, the number of country points will then be translated into a score of a maximum 8 points. Forexample, a total of 12 or more country points, which have been assigned to Cemex based on its broad geographicdiversification, translates into a score of 8. Market Position (25% of overall score): The analysis of a company’s overall competitive position is based on anassessment of its position in its core geographic markets in terms of revenue generation. If a company is only a regionalor niche player, a score of 2 would be assigned, as is the case for U.S. Concrete. Rinker Group will be assigned an 8 asit is amongst the top three players in at least three of its core markets.

A company with a score of 8 in the sub-factor Product Diversity, 4 in Geographical Diversification and 8 inMarket Position would result in a total score of 6 (8*25% + 4*50%+8*25%), which would then result in a rating factorrating of A.

Applying the sub-factor weightings and scores for each of the three sub-factors results in the following businessprofile assessment of the 12 companies:

Cement Consumption p.a. Max. Points Assigned Per Country* Examples

> 100 bn tons 4 China, India, USA< 100 - 40 bn tons 3 Japan, Spain, Russia< 40 - 10 bn tons 2 Brazil, Germany, Indonesia< 10 bn tons 1 Ukraine, Australia, Canada

* Max. number of points assigned for each country depends on company’s coverage of this country i.e. for a company that is active in the USA, 4 points would only be assigned if the company covers the Northern, Southern, Eastern and Western parts of the country

Translation Country of Points to Geographical Diversification Score# of country points score

> 12 88 - 12 63 - 7 4< 3 2

Factor Mapping: Business ProfileAaa-Aa A Baa Ba B Caa-C

Business Profile > 6.99 6.99 - 6.00 5.99 - 4.50 4.49 - 3.50 3.49 - 2.50 < 2.50

Company Mapping: Business Profile

Moody’s Rating

Indicative Factor Rating Sub Total

Product Line

DiversityGeographic

DiversityMarket Position

Rinker Group A3 A 6 8 4 8Martin Marietta Materials A3 Ba 3.5 2 4 4Boral Baa1 A 6 8 4 8CRH Baa1 Aaa-Aa 8 8 8 8Lafarge Baa2 Aaa-Aa 8 8 8 8Wienerberger Baa2 Aaa-Aa 7.5 6 8 8Cemex Baa3 Aaa-Aa 8 8 8 8Taiheiyo Baa3 Ba 4 6 4 2HeidelbergCememt Ba1 Aaa-Aa 7.5 6 8 8Camargo Correa Cimentos Ba3 Ba 3.5 4 2 6St. Marys Cement Ba3 B 3 2 4 2U.S. Concrete B1 B 3 2 4 2

= Positive Outlier = Negative Outlier


Observations and OutliersRegional players in the industry are more exposed to regional cycles in the market and therefore have been assigned alower score. In general the European and Australian producers of building materials, such as CRH, Boral, Lafarge andHeidelbergCement, as well as the Mexican cement producer Cemex, are among the leading and most diversifiedcompanies in the world and therefore have been assigned a score which is better than their actual rating. This isbecause the expansion of these companies has mainly been through debt-financed acquisitions. Martin Marietta Mate-rials scores below its current rating category, which Moody’s notes is attributable to its exclusively North Americanpresence and narrow product breadth, which is primarily limited to construction aggregates.

RATING FACTOR 2: SIZE AND STABILITY

Why it mattersSize: The size of a company’s core business segments is considered to be a determinant of relative market strength andoperating flexibility. Absolute and relative size should provide a platform for sustainable earnings and cash flow. Thesize of a business in the building material industry should also have a positive bearing on other key rating factors, suchas geographic and product diversification, flexibility of capacity allocation and cost absorption.Size should positively influence an issuer’s ability to compete in absolute terms of its cost structure, including its abilityto invest in future projects.Stability: In a business where regional cyclical swings in demand can influence revenues it is considered that thosebuilding material producers showing only low geographic diversity will show a higher revenue volatility than thosemore diversified producers which should be able to better balance different regional cycles. Moreover, companieshaving a higher exposure to strongly growing emerging markets are likely to show comparatively higher revenuegrowth patterns but they are also more exposed to higher volatility. Exceptionally strong revenue growth may also be asign of aggressive acquisition activity, which would also bear integration risk and would therefore score negatively onthis ratio.

High revenue volatility may not only reflect a company’s coverage imbalance; it can also influence profitabilityshould the company’s cost base not incorporate the necessary flexibility to adapt to capacity changes. Moody’s alsomeasures a company’s capacity to invest in its assets to derive value from existing and acquired business. Both theseeffects are captured in rating factor 3.

How We Measure itSize: We use the most recent annual revenues. Stability: This factor is measured by calculating a five-year volatility of revenues using the standard deviation.

Factor Mapping: Size and StabilityAaa-Aa A Baa Ba B Caa-C

Scale / Size > 12.50 $ bn 12.50 - 9.01 $ bn

9.00 - 3.01 $ bn

3.00 - 1.26 $ bn

1.25 - 0.26 $ bn

<0.26 $ bn

Revenue Volatility < 3.00 % 3.00 % - 7.49 %

7.50 % - 12.49 %

12.50 % - 17.49 %

17.50 % - 22.49 %

> 22.49 %


Observations and OutliersThe rating factor “Size and Stability” shows that the largest and most diversified companies in the industry, such asCemex and CRH, score high on the size sub-factor, but, because of external growth strategies, score less well on therevenue stability sub-factor, indicating integration and other risks which are involved in a strategy of external growth.

Rinker, for example, has significantly grown revenues and corresponding margins since 2003, mainly due to exter-nal growth but also through internal growth projects. Therefore the standard deviation is negatively impacted. In thiscase, Moody’s believes that this growth has been well managed and does not negatively impact on the company’s over-all ratings.

Cemex’s Caa-C model rating for revenue stability is a result of the distorting effects of the RMC acquisition in2005 on the standard deviation metric and the metric’s inability to reflect the significant integration progress made sofar. Our actual assessment affords management some time to implement its strategy.

RATING FACTOR 3: COST POSITION AND PROFITABILITY

Why it mattersGiven the industry’s cyclical character, a company’s ability to manage its overall cost structure and operating efficiencyis a critical factor in the rating analysis.

Factors that measure costs and operating efficiency help in assessing a company's ability to operate througheconomic downturns and its ability to service its debt. Debt coverage is also influenced by other obligations, which canvary extensively on a geographic basis due to regulatory, environmental compliance and other differences.

There are three sub-factors that Moody’s focuses on when analyzing the cost efficiency and profitability of build-ing materials producers:• Operating Margin • Operating Margin Stability • Return on Average Assets

How We Measure itOperating Margin: A five-year average of annual Operating Profit divided by annual revenue. This is a criticalmeasurement for analyzing the underlying operational profitability of a building materials producer. While Moody’slooks to maintain some stability in ratings in different operating and economic environments and considers the priortwo to three years’ results in combination with expectations for the next two years, this methodology uses, for illustra-tive purposes, the average Operating Profit to revenue ratio of the past five years as a proxy for performance throughboth peak and trough scenarios.Operating Margin Stability: The volatility of a five-year Operating Margin based on the standard deviation.

Company Mapping: Size and Stability

CompanyMoody’s Rating

Indicative Factor Rating

Scale / Size in USD bn

Indicative Sub-Factor

RatingRevenue Volatility


Rating

Rinker Group A3 B 5.1 Baa 26.1% Caa-CMartin Marietta Materials A3 Ba 2.0 Ba 8.9% BaaBoral Baa1 Baa 3.3 Baa 11.3% BaaCRH Baa1 A 18.0 Aaa-Aa 15.4% BaLafarge Baa2 Aa 19.9 Aaa-Aa 6.5% AWienerberger Baa2 Ba 2.4 Ba 10.2% BaaCemex Baa3 Ba 14.9 Aaa-Aa 43.4% Caa-CTaiheiyo Baa3 Baa 8.2 Baa 6.2% AHeidelbergCememt Ba1 Baa 9.7 A 8.1% BaaCamargo Correa Cimentos Ba3 B 0.2 Caa-C 13.2% BaSt. Marys Cement Ba3 B 0.6 B 20.1% BU.S. Concrete B1 Ba 0.6 B 7.6% Baa



Return on Average Assets: This is a strong measure of a company’s ability to generate a consistent and meaningfulreturn from its asset base. This metric specifically takes into account the capital-intensive nature of the industry. Thisis also a five-year average measurement. In each year, where available, EBIT is divided by the average of the currentand last year’s assets and the resulting group of ratios is averaged into a single metric. ROAA therefore gives us valuableinsight into management's execution ability, by measuring its capacity to continue investing in the right assets to derivevalue from the business.

Observations and OutliersTaiheiyo is a negative outlier in the operating margin. Although Taiheiyo’s margin level is lower than those of globalpeers, the low volatility of its business and margin has allowed it to generate relatively stable cash flow.

Cemex’s Aaa-Aa score on profitability is heavily influenced by the company’s dominant position in its Mexicanhome market, where important barriers to entry for imports exist and cement can be sold as a branded consumerproduct that generates premium margins. However, over the coming years profitability will likely fall into a single Acategory because of the lower profitability of the acquired RCM business, which is not yet fully reflected in the histor-ical five year operating margin average shown above.

Although demand for cement in Brazil has stagnated in recent years at a relatively low level and the industry hasreported an average idle capacity of 50%, until 2004 prices were successfully managed so as to provide strong operatingmargins of 25.6% on average in the period 2001-2004. In 2005, the entrance of new players producing cement fromimported clinker led established producers to reduce prices to defend their market shares, resulting in a dramaticdecline in Camargo Correa’s operating margin to negative 0.6%. The 5-year average operating ratios primarily reflectthe strong margins recorded in the 2001-2004 period. Moody’s expects some price recovery over the medium term,although only as far as 10% - 15%, equivalent to the Baa category, given the ongoing constraints of the high idle capa-city of the industry.

The volatility of the operating margin gives an indication of the business risk the companies are facing due to thecyclicality of their local markets. Accordingly, the larger and more diversified companies such as CRH or Lafarge scorehigh on this factor as they are able to continuously report stable margins. In contrast, Wienerberger, which has beenexposed to the weak German, Polish and Hungarian construction industries, scores relatively low, despite its goodgeographic diversification.

Factor Mapping: Cost Position and ProfitabilityAaa-Aa A Baa Ba B Caa-C

Profitability > 20.00 % 20.00 % - 15.01 %

15.00 % - 10.01 %

10.00 % - 7.51 %

7.50 % - 2.51 %

< 2.51 %

Profitability Volatility < 5.00 % 5.00 % - 9.99 %

10.00 % - 17.49 %

17.50% - 24.99 %

25.00 % - 39.99 %

> 39.99%

Return on Average Assets > 15.00% 15.00 % - 12.51 %

12.50 % - 7.51 %

7.50 % - 4.01 %

4.00 % - 2.01 %

< 2.01%

Factor Mapping: Cost Position and Profitability



5 y average Operating

Margin


Rating

5 y Operating

Margin Vol.


Rating 5 y ROAA


Rating

Rinker Group A3 A 15.5% A 23.4% Ba 19.5% Aaa-AaMartin Marietta Materials A3 Baa 13.7% Baa 14.7% Baa 10.0% BaaBoral Baa1 Ba 9.5% Ba 33.6% B 10.2% BaaCRH Baa1 Baa 9.3% Ba 6.0% A 9.7% BaaLafarge Baa2 Baa 13.4% Baa 5.9% A 7.8% BaaWienerberger Baa2 Ba 11.4% Baa 39.7% B 8.0% BaaCemex Baa3 A 21.1% Aaa-Aa 13.0% Baa 7.7% BaaTaiheiyo Baa3 Ba 4.7% B 14.9% Baa 4.3% BaHeidelbergCememt Ba1 Ba 9.8% Ba 29.0% B 6.4% BaCamargo Correa Cimentos Ba3 Baa 20.4% Aaa-Aa 58.2% Caa-C 13.5% ASt. Marys Cement Ba3 Baa 17.4% A 12.1% Baa 8.1% BaaU.S. Concrete B1 B 5.6% B 34.2% B 5.3% Ba



Given Boral’s impressive improvement in margins over the last five years the company scores low for volatility inoperating profitability. Apart from improving operating efficiency, these strong margins have also been achievedduring a period of strong demand levels within the Australian economy for new dwellings and as a result buildingmaterials, and reflect Boral's dependency on the Australian market.

St. Marys Cement’s operations are almost entirely restricted to cement, which has historically been a more stableand higher-margin business than downstream aggregates and concrete. St. Marys Cement’s return on assets is also arti-ficially inflated having excluded the leasing arrangement with its parent for two cement plants, purchased from Cemexin 2005, in historical figures.

Concrete production tends not to be as capital-intensive as cement and aggregates production, which supports thereturn on assets score for US Concrete, the largest independent ready-mixed concrete producer in the US.

RATING FACTOR 4: FINANCIAL MANAGEMENT STRATEGY

Why it mattersA company's financial policies are a critical component in the rating process for building materials companies as theyprovide insight into management’s philosophy regarding the company's capital structure and the financial risk underwhich it is willing to operate. For example, the more modest a company's debt levels, the greater the financial flexi-bility it has for coping in the industry's valleys.

Our analytical focus will be on targeted capital structure, debt levels, dividend policy including share repurchases,funding requirements for capital expenditure parameters, M&A activity and the respective financing, liquidity man-agement and tolerance within a band of financial metrics.

A debt rating is focused on the ability of an issuer to service its debt obligations in a timely manner and, therefore,any cash outflow that would otherwise have been designated to repaying debt or strengthening the future credit profileof the business is viewed as negative or at best as neutral.

In addition to quantitative factors, various qualitative considerations such as debt maturity profiles are also consid-ered in the analysis of financial policies. Ratios used in this area are felt to be the most revealing credit metrics andfurther provide an indication of a company's financial flexibility based on cash flow to debt measurements.

The conservativeness of the capital structure will also provide flexibility to absorb shocks or credit events, such asM&A activity. M&A is a common feature of the industry, which exhibits modest organic growth, with companiesprone to enter into corporate activity to spur revenue growth, expand business lines, consolidate market positions,advance cost synergies or seek to access raw materials or new technology. The impact of an acquisition on a rating willinvariably depend on the current capital structure and upon the size of the acquisition target, its cash flow characteris-tics and funding structure.

The methodology uses two leverage ratios: debt to capital and debt to EBITDA. These serve to demonstrate theoverall level of debt employed in the capital structure as well as the level by which debt exceeds the earnings generationcapability of the company. Debt to Capitalization: Although not a dynamic measure, debt to capital is a simple way to compare the capital struc-tures of companies operating within an industry. It also provides some insight into a company’s financial policies andshareholder strategies, including its tolerance for debt levels. Further, it is an important indicator for the cyclical build-ing materials industry in that it provides a snapshot of overall debt in the capital structure and, therefore, a windowinto a company’s ability to ride out a downturn in performance. Debt to EBITDA is a measure that balances the debt to capitalization ratio with the measurement of a company’sability to cover debt with a proxy level of cash flow, as indicated by EBITDA.

How We Measure itDebt to Capitalization: The debt to capital ratio is based on the most recent fiscal year. The discussion of this ratiowill also incorporate analysis of an issuer's funding sources and debt maturity profile, target capitalization levels andperformance against such targets as well as a company's acquisition history and philosophy on share repurchases andspecial dividends.Debt to EBITDA: is measured by a five-year average, which is illustrative of performance through a high and lowpricing environment.


Observations and OutliersTaiheiyo is a negative outlier based on the financials as of March 2005. However, according to the flash report as ofMarch 2006, the Debt to Capitalization ratio will strongly improve and the gap for the rating will therefore becomesmaller. On the debt to EBITDA figure Taiheiyo is also a negative outlier but this measure has been continuouslyimproving over the past year. Moody’s expects that this trend will continue following the expected debt reduction inthe coming years. The Baa3 rating already incorporates the improvement in the medium term.

While Camargo Correa’s Debt to Capitalization ratio of 30.4% translates into a Baa rating, Moody’s understandsthat companies operating in emerging markets, where funding costs are higher and the financial market is morevolatile, should report a stronger capital structure than those peers operating in developed countries. Accordingly,Moody's sees Camargo Correa’s 30.4% ratio as more reflective of a Ba rating. For the same reason, Moody’s believesthe 3.1x 5-year average ratio for the Debt to EBITDA sub-factor is more reflective of a Ba rating.

RATING FACTOR 5: FINANCIAL STRENGTH

Why it mattersCompanies in the cyclical building material industry need to generate sufficient earnings and cash flow to cover theircapital expenditures, in addition to dividends, interest expense and debt amortization. The three key indicators we useto measure financial strength are: (i) interest coverage, (ii) retained cash flow relative to net debt, and (iii) free cash flowrelative to debt. Interest coverage: Interest coverage can be particularly meaningful for speculative grade companies. This is espe-cially true if the interest rate environment is in a period of change – such as the migration from lower rates to higherrates – and an issuer is facing the need to refinance debt that is nearing maturity. For higher-rated companies, thismetric is viewed more as a proxy for financial flexibility.

The remaining two metrics relate to the amount of cash flow available to cover varied scenarios of both operatingneeds and financing needs.• Operating needs include major items such as working capital and capital spending.• Financing needs refers to the impact of dividends and the "free" cash then available to service debt.

Factor Mapping: Management StrategyAaa-Aa A Baa Ba B Caa-C

Debt / Capitalisation < 20.00 % 20.00 % - 29.99 %

30.00 % - 44.99 %

45.00 % - 64.99 %

65.00 % - 79.99 %

> 79.99%

Debt / EBITDA < 1.50 x 1.50 x - 2.49 x

2.50 x - 3.49 x

3.50 x - 4.49 x

4.50 x - 5.99 x

> 5.99 x

Company Mapping: Management Strategy



Debt / Capitalisation


RatingDebt /

EBITDA


Rating

Rinker Group A3 Aa 24.9% A 1.1 Aaa-AaMartin Marietta Materials A3 Ba 45.9% Ba 2.7 BaaBoral Baa1 Baa 40.5% Baa 2.0 ACRH Baa1 Ba 47.1% Ba 2.8 BaaLafarge Baa2 Ba 46.0% Ba 3.9 BaWienerberger Baa2 Ba 46.8% Ba 3.0 BaaCemex Baa3 Ba 46.8% Ba 3.3 BaaTaiheiyo Baa3 Caa 71.4% B 8.5 Caa-CHeidelbergCememt Ba1 Ba 45.3% Ba 4.0 BaCamargo Correa Cimentos Ba3 Baa 30.4% Baa 3.1 BaaSt. Marys Cement Ba3 Baa 39.4% Baa 2.9 BaaU.S. Concrete B1 Caa 73.8% B 8.5 Caa-C



Retained Cash Flow is a broader measure of financial flexibility than free cash flow as it excludes the potential 'noise'created by changes in working capital and unusual capital spending programs. Free Cash Flow is, in many instances, one of the most important and reliable measures of financial strength and flex-ibility. This metric reflects a company's primary source of liquidity as it directly speaks to management’s ability toservice its debt burden after considering both its operating and financial commitments to shareholders. In this metricwe often identify the relative risks associated with capital spending programs. At times, programs can have a directimpact on ratings because of the size of expenditure that may be involved as well as the risks of executing the programon time and on budget. If, for example, a large amount of capital is spent on new greenfield capacity and we believethat such capacity is being added at a time when product prices are low (i.e. there is a lack of an adequate return on thiscapital), the ratings may be negatively affected. There is also the risk that anticipated operating cash cost benefits uponproject completion are different than expected.

How We Measure itInterest Coverage: The five-year average of EBIT to gross interest expenseRetained Cash Flow to Net Debt: Funds from operations less dividends divided by net debt, calculated as average ofpast five years. Free Cash Flow to Debt: The five-year average of cash from operations minus capital expenditures and dividendsdivided by gross debt

Factor Mapping: Financial StrengthAaa-Aa A Baa Ba B Caa-C

EBIT / Interest > 10.00 x 10.00 x - 7.01 x

7.00 x - 4.01 x

4.00 x - 2.01 x

2.00 x - 1.01 x

< 1.01 x

RCF / Net Debt > 60.00 % 60.00 % - 40.01 %

40.00 % - 20.01 %

20.00 % - 10.01 %

10.00 % - 5.01 %

< 5.01 %

FCF / Debt > 22.5 % 22.50 % - 17.51 %

17.50 % - 7.01 %

7.00 % - 4.01 %

4.01 % - 1.00 %

< 1.00 %

Company Mapping: Financial Strength



EBIT Interest


RatingRCF / Net

Debt


RatingFCF /

Gross Debt


Rating

Rinker Group A3 Aa 13.1 Aaa-Aa 92.4% Aaa-Aa 30.3% Aaa-AaMartin Marietta Materials A3 Baa 3.7 Ba 28.4% Baa 7.5% BaaBoral Baa1 Ba 4.7 Baa 28.2% Baa 1.7% BCRH Baa1 Baa 5.2 Baa 37.5% Baa 14.3% BaaLafarge Baa2 Ba 3.5 Ba 17.7% Ba 4.1% BaWienerberger Baa2 Ba 3.3 Ba 20.3% Baa 3.0% BCemex Baa3 Baa 3.1 Ba 23.0% Baa 15.9% BaaTaiheiyo Baa3 B 3.4 Ba 7.3% B 1.3% BHeidelbergCememt Ba1 Ba 2.3 Ba 18.2% Ba 4.4% BaCamargo Correa Cimentos Ba3 Baa 1.8 B 54.4% A 14.5% BaaSt. Marys Cement Ba3 Ba 3.3 Ba 21.6% Baa 2.8% BU.S. Concrete B1 Ba 1.1 B 14.7% Ba 6.1% Ba



Observations and OutliersTaiheiyo is a negative outlier for RCF/ Net adj. Debt and FCF/ Gross Debt. Moody’s expects Taiheiyo’s ratios toimprove in the financial year to March 2006 and in the following years. These improvements have already been incor-porated into the current Baa3 rating.

As Boral has strong market shares in key Australian states, domestic competition regulations impede its ability togrow via acquisitions, as was seen when it attempted to acquire Adelaide Brighton. As a result, organic growth,through expanding current production facilities and new greenfield operations, provides the primary avenue for Boral’sfuture growth. As there is usually a delay between the expenditure of these amounts and the deriving of correspondingearnings and cash flows in subsequent periods, Boral scores low on the FCF/debt ratio. The same applies to Wiener-berger. The expansion into emerging markets is primarily done via new greenfield investments, rather than via acqui-sitions of outdated plants in the respective markets. The FCF/debt metric is also negatively impacted by the time gapbetween the investment and the cash flows achieved from the investment.

Martin Marietta Materials' interest coverage score is limited by lower margins attained during the 2002-2003economic slowdown in the US, although EBIT margins have rebounded significantly since that period. Similarly,Martin Marietta Materials' free cash flow generation is currently constrained by its aggressive capital spending effortsin the US and Nova Scotia, resulting in a Ba FCF/Debt score that is inconsistent with its current rating category.

Other Rating Considerations

Other Risk FactorsThe rating assessment also typically considers other risks that cannot be readily captured in the grid because they arespecific to certain companies. Other factors reflected in Moody’s ratings include:• Quality of management• Corporate governance• Liquidity management• The extent, quality, comparability and frequency of financial disclosure• Event Risk of major debt-financed acquisitions

These rating considerations are common to all corporate finance issuers and are therefore not specifically orextensively captured in our building materials rating methodology. However, the analysis of these factors remains anintegral part of our rating process and is described in a number of separate reports published by Moody’s.

Net Debt Versus Gross DebtA number of the ratios used in this methodology are presented on a gross debt basis, whereas the RCF to net debt ispresented on a net debt basis (i.e. gross debt minus cash and cash equivalents). In fact, Moody’s takes both intoconsideration:• Cash balances are partly working cash which needs to remain in the business. In the US in particular, cash bal-

ances are generally modest and are generally only from working capital. • Moreover, cash may be in subsidiaries or jurisdictions in which friction costs (e.g. income taxes, withholding taxes)

may make it inappropriate to use net debt. Plus, there could be covenant restrictions limiting the ability of cash togo upstream into holding companies.

• In Europe and emerging markets in general, a number of companies prefer to centralize cash balances on thebooks of the holding company, while maintaining debt at the subsidiary level. We also generally observe a higherwillingness of European and emerging market companies to maintain higher cash balances, which may sometimesbe linked to tax considerations, or more broadly the consequence of a higher level of caution on the availability orvolatility of funding in the bank or bond markets and considering that committed credit facilities are not usual inemerging markets. Considering only gross debt may not reflect the real financial strength of these companies andMoody’s may consider focusing on net debt. However, in this case we assess the quality of liquidity, including theexpectation that cash balances can be liquidated at least at book value and without tax costs.

Standard Adjustments Consistent with Moody’s standard adjustments, we adjust financial statements for operating leases (using a 5xmultiple), unfunded pension liabilities, hybrid securities and other standard adjustments. Consistent with our approachto adjust full sets of financial statements, we adjust the components of capitalization for these same items.



Do We Look at Financial Metrics Differently in Speculative Grade?We use the same credit metrics across the entire rating scale. However, for speculative-grade companies we placeadditional emphasis on the following:• Access to liquidity is a key rating differentiator. In our analysis, we focus on external committed facilities, covenant

cushion as well as the access to capital markets. In emerging markets, where committed credit facilities are notusual, the consistent maintenance of adequate level of cash position is observed by Moody’s.

• Ability to de-leverage the business. As a result, we would look at existing credit metrics, and take a stance on where themetrics are likely to be over the medium term, and how likely the issuer is to achieve these metrics. If we are verycomfortable that the fundamental operations of an issuer will allow a material improvement in metrics over thenext 12 to 18 months, this will be factored into our assessment of the rating grid.

• A prospective view on metrics can also be more critical in speculative grade, because historical financial statements may beunrepresentative of current and expected financial performance due to growth, a series of acquisitions, or deterio-ration in the current operating environment. In such cases, we focus on pro-forma financials as a starting point forour assessment. Financial projections are critical in our analysis because they are based on the more recent andlikely future performance. Projections incorporate considerable assumptions. By starting with a pro forma, we canidentify positive gaps in assumptions.

• Cash-flow variations are much more critical for speculative-grade issuers than for their investment-grade counterparts.As a result, we may choose to focus more on cyclical and seasonal cash flow variations and on the absolute level offree cash flows than would be the case for investment-grade issuers.

• As a company’s rating approaches investment grade, we assign a higher weighting to qualitative factors, particularly itsoverall risk appetite and the quality of its business model as an indicator for revenue sustainability. Companies thatlack scale or diversification, have a weak market position or operate in unattractive categories may never reachinvestment grade. If a company’s operating performance is moderately weak in one of these respects or if a man-agement team has historically displayed a high tolerance for risk through acquisition activity or financial policy, wemay require stronger credit metrics for an upgrade into investment grade than might otherwise be the case. As aresult, some Ba-rated companies have stronger credit metrics than Baa-rated companies with a more robust busi-ness model and a lower risk appetite.

Final Consideration

Appendix 1 illustrates the mapping and ratios for each of the measured factors as well as each company’s overallimplied rating using weightings as indicated in the Appendix. For each factor we have highlighted favorable and unfa-vorable outliers of two or more full rating categories..

For the 12 selected building materials companies analyzed in this methodology, we make the following observations:• The indicated ratings of 8 of the 12 companies (66 2/3%) either match the current rating or fall within one notch of it. • Three companies (25%; 91 2/3% cumulative) have indicated ratings that are two notches higher or lower than

their current ratings. • Only one company has an indicated rating that is three notches higher or lower than the existing rating.

Further conclusions are:• We believe that the rating methodology is useful in identifying companies that fall outside of the indicated ranges

for individual measurement criteria – either favorably or unfavorably – and determining whether there are offset-ting factors to compensate for this.

• As can be seen in the chart in Appendix 1, the indicated rating categories for some of the companies vary consider-ably across the factors. Especially smaller companies, such as St. Marys Concrete or U.S. Concrete score high interms of margin, and cash flow to debt measures, but lack the geographic and business diversity which is expectedto heavily expose these companies to the local cycle in the construction industry.

• Although all main rating factors are weighted equally in arriving at the mapped rating, the measurement of thedegree of leverage employed in the capital structure relative to both earnings and cash flow generation is a parti-cularly important rating consideration, as are size and business profile. Overall, debt is represented in four of thenine financial metrics, and the business profile and size is represented in four of all 13 rating sub-factors.

• According to the methodology, Moody’s allows companies with a broader business profile and diversification tohave a higher leverage and indebtedness than companies with a more limited and focused business model toachieve the same rating category. Therefore, despite scoring relatively low in terms of Financial Strength andManagement Strategy, Lafarge, for example, maps comfortably to the Baa category.

Related Research

Rating Methodologies: Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-FinancialCorporations – Part I, February 2006 (96760)Moody’s Approach to Global Standard Adjustments in the Analysis of Financial Statements for Non-FinancialCorporations – Part II, February 2006 (96729)Industry Outlook: European Building Materials, February 2006 (96813)

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of thisreport and that more recent reports may be available. All research may not be available to all clients.


http://www.moodys.com/cust/getdocumentByNotesDocId.asp?criteria=PBC_96760





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Appendix 2

Ratings GridRating Category Aaa-Aa A Baa Ba B Caa-C

1) Business ProfileBusiness Profile Assessment > 6.99 6.99 - 6.00 5.99 - 4.50 4.49 - 3.50 3.49 - 2.50 < 2.50

2) Size & StabilityRevenues (USD bn) > 12.50 $ bn 12.50 -

9.01 $ bn9.00 - 3.01 $ bn

3.00 - 1.26 $ bn

1.25 - 0.26 $ bn

< 0.26 $ bn

Revenue Volatility (5 yr. Standard Deviation)

< 3.00 % 3.00 % - 7.49 %

7.50 % - 12.49 %

12.50 % - 17.49 %

17.50 % - 22.49 %

> 22.49 %

3) Cost position and ProfitabilityOperating Margin (5 yr. average) > 20.00 % 20.00 % -

15.01 %15.00 % - 10.01 %

10.00 % - 7.51 %

7.50 % - 2.51 %

< 2.51 %

Operating Margin Volatility (5 yr. Standard Deviation)

< 5.00 % 5.00 % - 9.99 %

10.00 % - 17.49 %

17.50% - 24.99 %

25.00 % - 39.99 %

> 39.99%

Return on Average Assets (5 yr. Average)

> 15.00% 15.00 % - 12.51 %

12.50 % - 7.51 %

7.50 % - 4.01 %

4.00 % - 2.01 %

< 2.01%

4) Management StrategyDebt / Capitalisation < 20.00 % 20.00 % -

29.99 %30.00 % - 44.99 %

45.00 % - 64.99 %

65.00 % - 79.99 %

> 79.99%

Debt / EBITDA (5 yr. Average) < 1.50 x 1.50 x - 2.49 x

2.50 x - 3.49 x

3.50 x - 4.49 x

4.50 x - 5.99 x

> 5.99 x

5) Financial StrengthEBIT / Interest (5 yr. Average) > 10.00 x 10.00 x -

7.01 x7.00 x - 4.01 x

4.00 x - 2.01 x

2.00 x - 1.01 x

< 1.01 x

RCF / Net Debt (5 yr. average) > 60.00 % 60.00 % - 40.01 %

40.00 % - 20.01 %

20.00 % - 10.01 %

10.00 % - 5.01 %

< 5.01%

FCF / Debt (5 yr. average) > 22.5 % 22.50 % - 17.51 %

17.50 % - 7.01 %

7.00 % - 4.01 %

4.01 % - 1.00 %

< 1.00%


Appendix 3: Key Ratio Definitions

OPERATING MARGIN (5 YEAR AVERAGE)Adjusted Operating Profit = Operating Profit + 1/3 Lease Expense

Operating Margin (%) = 5 Year Average of Operating Profit Divided by Annual Revenues

RETURN ON AVERAGE ASSETS (5 YEAR AVERAGE)EBIT = Pretax Income + Interest Expense

Total Average Assets = Average Assets of the Last Two Years Divided by Two

ROAA (%) = 5 year Average of EBIT Divided by Total Average Assets

DEBT TO BOOK CAPITALIZATIONDebt as Reported = ST Debt + LT Debt

Capitalization = Debt as Reported + Deferred Taxes + Minority Interest + Book Equity

Debt to Book Capitalization (%) = Most Recent Year’s Debt Divided by Most Recent Year’s Capitalization

GROSS DEBT TO EBITDA (5 YEAR AVERAGE)Gross Debt = ST Debt + LT Debt + Operating Leases + Pension Liabilities + Securitization + Preferred Shares &Hybrids + Guarantees

EBITDA = EBIT + Depreciation & Amortization

Debt to EBITDA = 5 Year Average of Annual Year End Debt Divided by Annual EBITDA

INTEREST COVERAGE (5 YEAR AVERAGE)Interest Expense = Interest paid + Capitalized Portion of Interest

Interest Coverage = 5 Year Average of Annual EBIT Divided by Annual Interest Expense

RETAINED CASH FLOW TO NET DEBT (5 YEAR AVERAGE)Retained Cash Flow = Funds From Operations (pre Working Capital) – Dividends

Net Debt = ST Debt + LT Debt + Operating Leases + Pension Liabilities + Securitization + Preferred Shares &Hybrids + Guarantees – Cash and Cash Equivalents

Retained Cash Flow to Net Debt = 5 Year Average of Annual Retained Cash Flow Divided by Net Debt

FREE CASH FLOW TO GROSS DEBTFree Cash Flow = Cash Flow from Operations – Dividends – Capex

Free Cash Flow to Gross Debt = 5 Year Average of Annual Free Cash Flow Divided by Gross Debt


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Author Senior Associate Editor Senior Production Associate

Matthias Hellstern Sabine Renner Justin Neville Kerstin Thoma

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