TEXT-S&P release on Headwaters Inc

(The following statement was released by the ratings agency)

Aug 19 - Standard & Poor's Ratings Services affirmed its ratings on Headwaters Inc (HW.N: Quote, Profile, Research), including its 'B+' corporate credit rating. At the same time, we removed all ratings from CreditWatch where they were originally placed on May 13, 2008, with negative implications. The outlook is negative.

"The affirmation and removal from CreditWatch follow the company's announcement that it has obtained an amendment to its credit agreement that temporarily loosens financial covenants and allows additional flexibility for capital leases and sale-leaseback transactions," said Standard & Poor's credit analyst Pamela Rice. "As a result, our concerns regarding near-term liquidity are lessened."

However, Headwaters' financial performance continues to be hurt by the deep housing downturn and lower remodeling spending. At the same time, the company's cash flow is constrained by meaningful spending to build additional coal-cleaning facilities. Although these facilities should begin to generate meaningful earnings and cash flow in fiscal 2009, we remain concerned that liquidity could shrink further, given the difficult operating conditions.

The ratings on Headwaters, based in South Jordan, Utah, reflect cyclical demand for its building material products and the challenge of replacing the earnings generated by its former alternative energy business. These factors overshadow Headwaters' strengths, including its favorable position within selected niche businesses and attractive operating margins.

The construction materials businesses, which account for about one-half of Headwaters' total sales and operating income, include the manufacture of injection-molded plastic exterior building products, architectural manufactured stone, and concrete blocks. The majority of sales in this segment is derived from residential repair and remodeling, which, while less cyclical than new construction, has slowed over the past few quarters, a trend that we believe will continue into 2009. In addition, we expect new residential construction to remain very weak through 2009. (New York Ratings Team)