TEXT-S&P affirms PPG Industries 'BBB+' rating

Tue Jul 31, 2012 3:29pm EDT

Overview
     -- PPG Industries Inc. is issuing $400 million in senior notes due 2022.  
     -- We're assigning a 'BBB+' senior unsecured debt rating to the proposed 
notes. 
     -- We are affirming our 'BBB+' corporate credit rating and 'A-2' 
short-term rating on the company. The outlook is stable. 

Rating Action

On July 31, 2012, Standard & Poor's Ratings Services assigned its 'BBB+' 
senior unsecured debt rating to PPG Industries Inc.'s proposed $400
million senior notes maturing in 2022, which the company will draw down from its
existing shelf registration. PPG will use proceeds from the proposed notes 
issuance to repay at maturity a portion of the outstanding 5.75% notes due 
2013 and for general corporate purposes. We affirmed the existing ratings on 
PPG, including the 'BBB+' long-term corporate credit rating and the 'A-2' 
short-term rating. The outlook is stable.

Rationale

The ratings on Pittsburgh, Pa.-based PPG Industries Inc. (PPG) incorporate 
Standard & Poor's Ratings Services' assessment of the company's "strong" 
business risk and "intermediate" financial risk. The ratings also reflect 
PPG's competitive positions in large coatings markets, its significant 
geographic diversity (more than 50% of its sales come from outside North 
America), and its prospects for continued improvement in earnings and 
operating margins over the business cycle and for meaningful discretionary 
cash flow. 

With annual revenues of $13 billion (pro forma for the recently announced 
separation of its commodity chemicals business), PPG's diversified coatings 
portfolio includes products for global automotive original equipment 
manufacturers (OEM), automotive refinishing, general industrial markets, and 
the global architectural market. In addition to industrial production growth, 
key factors influencing demand include North American and western European 
auto production and new vehicle registrations, and U.S. housing starts and 
commercial construction. The industrial coatings segment (for the automotive 
OEM, industrial, and packaging sectors) and performance coatings segment (for 
the automotive refinish, architectural, aerospace, protective, and marine 
sectors) currently constitute more than 50% of consolidated operating income.

PPG recently agreed to separate its commodity chemicals business and then 
merge it with Georgia Gulf Corp. (BB-/Watch Pos/--) in a Reverse Morris Trust 
transaction. The transaction value of about $2.1 billion includes $900 million 
of cash to be paid to PPG. Upon closing, PPG shareholders will own 50.5%, and 
Georgia Gulf existing shareholders will own the remaining 49.5% of the merged 
entity. The transaction, which management expects to close by late 2012 or 
early 2013, is subject to the receipt of a tax ruling from the U.S. IRS 
regarding the tax-free nature of the transaction, Georgia Gulf shareholder 
approval, and other customary conditions. The separation will further increase 
PPG's coatings sales to 83% of pro forma sales. 

Operating results in the first six months of 2012 improved from 2011, 
reflecting growth of 1% in sales volumes, 2% from acquisitions, and 3% higher 
prices, which were partially offset by 3% negative foreign currency 
translation. Despite inflationary raw material costs, PPG maintains 
satisfactory EBITDA margins of about 16%. The company continues to focus on 
growth in emerging regions, operating efficiency, and technological 
innovations for new products.

PPG's optical and specialty materials segment (10% of pro forma sales in the 
first six months of 2012), which includes transitions brand photochromic 
technology for plastic lenses and Trivex lens material, is another key 
business. It accounts for a modest percentage of total sales, but it has 
strong margins.  

The company incurred significant debt to finance its January 2008 acquisition 
of SigmaKalon (a global producer of architectural, marine, and industrial 
coatings), adding about $3 billion in annual sales. The acquisition also 
helped PPG's business risk by transforming its overall sales mix to primarily 
that of a coatings company. The key ratio of funds from operations (FFO) to 
total adjusted debt was 32% as of June 30, 2012, in the appropriate range of 
30% to 35% for the current rating. Total adjusted debt includes operating 
leases, substantial unfunded postretirement obligations, and environmental 
liabilities. Our debt measures also include after-tax cash payments of the 
potential asbestos-related settlement involving Pittsburgh Corning Corp. PPG 
continues to generate discretionary cash flows, and we expect management to 
maintain appropriate financial risk, balancing share repurchases and small to 
medium size bolt-on acquisitions. 

In January 2009, Pittsburgh Corning (50% owned by PPG) filed an amended plan 
of reorganization in the U.S. Bankruptcy Court (the company filed for 
bankruptcy protection in 2000). Under the terms of the amended plan, all 
current and future personal-injury claims against PPG related to asbestos 
exposure from products Pittsburgh Corning manufactured will be channeled into 
a trust for resolution. The amended plan includes a modified PPG settlement 
arrangement: payments to the trust by PPG, and the company's participating 
insurers would begin after the amended plan becomes effective, subject to 
court approval and appeals processes. Under the modified settlement 
arrangement, PPG's aggregate cash payments to the trust currently total $825 
million for claims. The obligation is payable according to a fixed payment 
schedule ending in 2023, and PPG has the right to prepay these cash payments 
to the trust at any time at a discount rate of 5.5% per year. PPG will retain 
$162 million as a reserve for asbestos-related claims that will not be 
channeled to the trust.

Liquidity

We characterize PPG's liquidity position as "adequate". As of June 30, 2012, 
its cash position was $1 billion, and the company had full availability under 
its $1.2 billion unsecured revolving credit facility maturing in August 2013. 
PPG can increase the size of the credit agreement by up to $300 million, 
subject to the receipt of lender commitments and other conditions. The company 
indicated that it expects to use proceeds received from the separation of the 
commodity chemicals business for general corporate purposes--including 
acquisitions and share repurchases. 
We base our liquidity assessment on the following expectations and assumptions:

     -- The company's liquidity sources (including cash, FFO, and credit 
facility availability) over the next two years will exceed its uses by more 
than 1.2x. 
     -- Even if EBITDA declines by 15%, sources would exceed uses of cash.
     -- Under the credit agreement, the company is subject to a financial 
ratio covenant of maximum total debt to capitalization of 60%, and it will 
maintain a reasonable cushion with regard to covenant compliance.
     -- The company will preserve liquidity at levels consistent with the 
current financial profile (our current assessment of liquidity incorporates 
some cushion for potential outflows with respect to shareholder rewards, 
acquisitions, and capital spending, although we expect management will 
maintain adequate liquidity).

We expect capital spending for 2012 to be about 2.5% to 3.5% of sales. The 
company expects to make a voluntary contribution of up to $60 million to its 
U.S. defined benefit pension plans in 2012 and to make mandatory contributions 
of about $90 million to the non-U.S. pension plans in 2012. 

PPG completed $92 million in share repurchases in the first quarter of 2012. 
It will not repurchase any shares until it receives the tax rulings for the 
separation of the commodity chemicals business or the transaction closes. 

Outlook

The stable outlook reflects our expectation that PPG will maintain what we 
consider appropriate credit measures for the ratings, including FFO to debt of 
30% to 35%. Management's commitment to maintaining appropriate financial 
policies is an important consideration, and we expect PPG to keep outlays for 
acquisitions and share buybacks at reasonable levels to maintain the financial 
risk profile. We could raise the ratings if improved earnings and continued 
debt reduction help FFO to total adjusted debt improve to and remain at or 
above 40%.

We could lower the ratings if larger-than-expected acquisitions or shareholder 
initiatives, or a major unforeseen operating setback results in deteriorating 
credit measures. From an operating standpoint, such a scenario could develop 
if sales volumes declined while the operating margin declined to 11% to 13%, 
causing FFO to total debt to move toward 20%.

Related Criteria And Research

     -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009
     -- Key Credit Factors: Business and Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008

Ratings List

Ratings Affirmed

PPG Industries Inc.
 Corporate credit rating                BBB+/Stable/A-2    

PPG Industries Inc.
 Senior unsecured                       BBB+               
 Commercial paper                       A-2                

New Rating

PPG Industries Inc.
 Senior unsecured                       BBB+               


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