TEXT-S&P affirms PPG Industries 'BBB+' rating
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+ Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.