Fitch Ratings expects to assign a 'BB/RR1' rating to USG Corporation's (USG) proposed private offering of $250 million of senior unsecured notes. The new issue will be guaranteed on a senior unsecured basis by certain of USG's domestic subsidiaries. The company intends to use the net proceeds from the sale of the notes for general corporate purposes, which may include the repayment of indebtedness, working capital, capital expenditures and acquisitions.

As a result of the proposed new debt issuance, the Recovery Rating (RR) on USG's existing senior unsecured notes that are not guaranteed by the company's subsidiaries are being downgraded as follows:

--Senior unsecured notes to 'B/RR4' from 'B+/RR3';

--Convertible senior unsecured notes to 'B/RR4' from 'B+/RR3'.

Fitch currently rates USG as follows:

--Issuer Default Rating (IDR) 'B';

--Secured bank credit facility 'BB/RR1'.

The Rating Outlook is Negative.

Fitch's '1' RR on USG's $500 million secured revolving credit facility and the proposed $250 million unsecured notes issuance indicates outstanding recovery prospects for holders of this debt issue. Although the proposed senior unsecured notes are effectively subordinated to the company's secured debt, including the $500 million secured revolving credit facility, the recovery prospects for both of these debt classes are similar given USG's strong asset coverage. Fitch's '4' RR on USG's senior unsecured notes indicates average recovery prospects for holders of these debt issues. As noted earlier, the company's existing senior unsecured notes are not guaranteed by USG's subsidiaries. Fitch applied a liquidation analysis for these RRs.

The rating for USG is based on the company's leading market position in all of its business segments, strong brand recognition, low cost structure, its large manufacturing network and sizeable gypsum reserves. Risks include the cyclicality of the company's end markets, excess capacity currently in place in the U.S. wallboard industry, and volatility of wallboard pricing and shipments.

The Negative Outlook for USG reflects a more challenging outlook for housing, the home improvement and non-residential construction sectors during the balance of 2009.

Net sales of $829 million for the second quarter (ended June 30, 2009) declined 33.7% year-over-year as the housing, home improvement and commercial markets continued to deteriorate.