Fitch Rates PPG’s Proposed Euro 1B Sr. Unsecured Notes Offering ‘A-‘; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned an ‘A-‘ rating to PPG Industries, Inc.’s (NYSE: PPG) proposed offering of Eur1 billion aggregate amount of senior unsecured notes. The offering is expected to be comprised of Eur500 million of 7-year notes and Eur500 million of 12-year notes. These issues will be ranked on pari passu with all other senior unsecured debt. Proceeds from the notes offering will be used to fund Eur300 million notes maturing in June 2015, to repay borrowings under its commercial paper (CP) program, and for general corporate purposes.
The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
The ratings for PPG reflect a geographically well-balanced company with a heightened focus on its coatings businesses, leading market positions in all of its coatings end-markets, consistent robust earnings, and excellent free cash flow (FCF) generation. Risk factors include the cyclicality of most of PPG’s end-markets, aggressive growth strategy, and the company’s exposure to asbestos litigation.
The Stable Outlook reflects PPG’s strong liquidity position, management’s consistent and disciplined capital allocation strategy, and Fitch’s expectation of a moderate improvement in most of PPG’s end-markets in 2015.
COMEX ACQUISITION AND RATIONALE
In November 2014, PPG finalized the acquisition of Consorcio Comex S.A. de C.V. (Comex) for $1.98 billion, net of cash acquired of $69 million. PPG also repaid $280 million of third-party debt assumed in the acquisition.
Founded in 1952, Comex is a privately held architectural and industrial coatings company headquartered in Mexico City, Mexico. The company manufactures coatings and related products in Mexico and sells them in Mexico and Central America through approximately 3,700 stores that are independently owned and operated by more than 700 concessionaires (independent dealers). Comex also sells its products through regional retailers, wholesalers and direct sales customers. The company has approximately 3,900 employees, eight manufacturing facilities and six distribution centers, and had sales of approximately $1 billion in 2013.
Fitch views this transaction as strategically positive for PPG. The acquisition adds a leading architectural coatings business in Mexico and Central America, a region where PPG has limited architectural coatings presence. Additionally, the Comex operation enables PPG to expand its industrial coatings business in the region. The acquisition is also consistent with PPG’s stated strategy of expanding its global coatings portfolio.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SigmaKalon in 2008, divestiture of the commodity chemicals business in early 2013, acquisition of the North American architectural coatings business of Akzo Nobel N.V. Amsterdam in April 2013, divestiture of its 51% interest in the Transitions Optical joint venture to Essilor International, and the acquisition of Comex further reflect PPG’s transformation into primarily a coatings company.
The rating incorporates Fitch’s expectation that PPG’s credit metrics will remain relatively stable following the acquisition. PPG funded the acquisition primarily using cash and short-term investments and some short-term borrowings. PPG’s leverage as measured by debt-to-EBITDA settled at 1.7x at year-end 2014 compared with 1.4x at the conclusion of 2013.
Leverage at the end of 2014 was 1.7x compared with 1.4x at year-end 2013. Funds from operations (FFO) adjusted leverage settled at 3.3x at the conclusion of 2014 compared with 3x at the end of 2013. EBITDA-to-interest was 11.8x during 2014 compared with 11.5x during 2013. Fitch expects debt-to-EBITDA will settle at or below 1.5x while FFO adjusted leverage will be roughly 3x at year-end 2015 and that interest coverage will be above 12x during 2015.
SOLID LIQUIDITY AND FREE CASH FLOW GENERATION
As of Dec. 31, 2014, the company had $686 million of unrestricted cash, $497 million of short-term investments and $935 million of CP borrowings that are supported by its $1.5 billion revolving credit facility.
In December 2014, PPG completed a debt refinancing which included the redemption and tender offer of about $1.48 billion of senior notes and debentures. Total cash consideration for the redemptions and tender offers were $1.7 billion, which included $222 million of make-whole premiums. These transactions were funded with approximately $1.2 billion of new debt and cash on hand, including the issuance of: $300 million of 2.3% senior notes due 2019; Eur500 million three-year bank term loan; Eur80 million of 2.5% senior notes due 2029; Eur120 million 3% senior notes due 2044.
PPG’s debt maturities are well-laddered, with roughly $366 million coming due in 2015, $253 million in 2016, $608 million in 2017 and $127 million in 2018.
PPG also generates strong free cash flow (FCF). In 2014, the company generated $580 million of FCF, compared with $841 million during 2013, $1.02 billion during 2012 and $691 million during 2011. Fitch expects FCF will represent approximately 4.5%-5.5% of sales in 2015 and 2016.
DISCIPLINED CAPITAL ALLOCATION STRATEGY
PPG has been consistent in prioritizing the use of its cash and FCF, with the goal of strengthening its core businesses and providing benefits to its shareholders. At times, the company has been aggressive in repurchasing stock, particularly when the company did not find suitable acquisition opportunities. However, in the past, PPG has shown discipline in pulling back on share repurchases following a sizeable acquisition in an effort to reduce debt.
In April 2014, PPG announced a 10% increase in quarterly dividend payments effective in June 2014. In October 2011, the board authorized a repurchase program under which the company repurchased about 10 million shares totaling roughly $1.65 billion. In April 2014, PPG’s board authorized a new $2 billion share repurchase program. During 2014, PPG repurchased 3.8 million of its shares for $750 million. Over the past five years, the company spent $3.3 billion of cash to repurchase about 28 million shares of its stock. At year-end 2014, PPG had about $1.7 billion remaining under its current repurchase authorization.
In January 2015, PPG announced a cash deployment target for acquisitions and share buybacks of between $1.5 billion and $2.5 billion for 2015 and 2016 combined. Fitch believes that PPG can generate sufficient FCF to fund its cash deployment target without straining its liquidity position or increasing debt.
PPG has been a defendant in lawsuits involving asbestos claims for over 30 years, mostly related to its 50% ownership of Pittsburgh Corning Corporation (PC), a 50-50 venture owned by PPG and Corning Incorporated. Under the terms of the current settlement arrangement, PPG would make aggregate cash payments of $825 million (payable according to a fixed payment schedule over a period ending 2023), contribute 1.4 million shares of its stock, and convey the stock it owns in PC to a trust. PPG’s participating historical insurance carriers would make cash payments to the trust of approximately $1.7 billion.
If the asbestos settlement becomes effective, Fitch believes that the company has sufficient cash and CP/bank revolver availability to meet the required cash payments.
In addition, the company also has $162 million of reserves for asbestos-related claims that will not be channeled to the trust. PPG currently does not have sufficient current claim information or settlement history on which to base a better estimate of this liability. The current settlement agreement also does not cover ‘premises’ claims, which comprise less than 2% of the total asbestos related claims against PPG.
Fitch’s key assumptions within its rating case for the issuer include:
–Overall U.S. construction spending increases 7% during 2015;
–Global demand for new vehicles increase modestly in 2015;
–Revenues grow mid-single-digits on a pro forma basis;
–EBITDA margins in 2015 remain relatively stable compared with 2014 margins;
–Debt/EBITDA approximates 1.5x and interest coverage sustains above 12x at the end of 2015;
–The company reports FCF margin of 4.5%-5.5% during the next few years;
–PPG undertakes moderate share repurchases funded by FCF.
Future ratings and Outlooks will be influenced by broad end-market trends, as well as company-specific activity, particularly FCF trends and uses, and liquidity.
While Fitch does not currently anticipate a positive rating action in the next 12-18 months, one may be considered if the company’s credit metrics improve meaningfully from current levels, including leverage consistently in the 1x-1.5x range and interest coverage steadily above 15x, and if PPG maintains a high cash balance until its asbestos liabilities are settled.
Negative rating actions could occur if the recovery in PPG’s various end-markets dissipates and affects volumes, and/or sustained materials and energy cost pressures contract margins, leading to weaker than expected financial results and credit metrics, including: pro forma revenue decline of 10%; EBITDA margins falling to between 11%-12%, and leverage levels consistently above 2x.
Fitch may also consider a negative rating action if management takes on another sizeable acquisition and/or undertakes a meaningful share repurchase program funded by debt, resulting in consistent debt-to-EBITDA levels above 2x.
Fitch has the following ratings for PPG with a Stable Outlook:
–Long-term Issuer Default Rating ‘A-‘;
–Senior unsecured debt ‘A-‘;
–Unsecured revolving credit facility ‘A-‘;
–Short-term IDR ‘F2’;
–Commercial paper ‘F2’.
Additional information is available at ‘www.fitchratings.com‘.
Applicable Criteria and Related Research:
–‘Corporate Rating Methodology’ (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage
Robert Rulla, CPA, +1-312-606-2311
Fitch Ratings, Inc.
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Chicago, IL 60602
Robert Curran, +1-212-908-0515
Michael Simonton, +1-312-368-3138
Alyssa Castelli, New York, +1-212-908-0540
Elizabeth Fogerty, New York, +1-212-908-0526