TEXT-S&P revises Masco Corp outlook to negative

Overview

-- U.S. home improvement and repair supplier Masco had
weaker-than-expected second-quarter operating results, with sales and EBITDA
at about the same level compared with the same period 2011.
-- We are revising our outlook on Masco to negative from stable. At the
same time, we are affirming our 'BBB-' corporate credit and senior unsecured
debt ratings.
-- The negative outlook reflects our view that Masco's near-term
operating results may not be sufficient to improve credit measures to our
previous expectations of about 5x debt leverage by the end of 2012 and to 4x
or less by the end of 2013.

Rating Action
On Aug. 14, 2012, Standard & Poor's Ratings Services revised its outlook on
Taylor, Mich.-based Masco Corp. to negative from stable. At the same time, we
affirmed our ratings, including the 'BBB-' corporate credit rating, on Masco.

Rationale
The outlook revision reflects our assessment that economic weakness in Europe,
still cautious repair and remodeling spending in the U.S., and inconsistent
(but improving) housing market recovery has increased the likelihood that
Masco's operating results and credit measures for full-year 2012 and 2013 will
be weaker than our prior expectations. (We had expected modest year over year
improvement.)

In our previous base case scenario, Standard & Poor's forecasted Masco's
credit measures to improve in the near term because of the significant
restructuring charges and cost reductions the company has taken over the past
three years. Our expectation was that the improved earnings would allow Masco
to reduce debt to EBITDA to about 5x by year-end 2012 and about 4x by the end
of 2013. However, Masco's second-quarter sales and EBITDA were less than our
previous expectations due to:
-- Negative foreign currency impact. International sales declined 9% but
were flat in local currencies;
-- Lower than expected sales in the second quarter. Favorable weather
early in the year pulled demand forward; i.e., projects were completed in the
first quarter which otherwise would have been done later in the year; and
-- Still weak repair and remodeling spending. Masco's cabinet business,
in particular, has underperformed.

While we still expect Masco to improve its credit measures, with debt leverage
at slightly above 5x by year-end 2012, the risk has increased that further
economic weakness in Europe, a delay or pause in the tenuous U.S. housing
recovery, or a dampening effect on consumer repair and remodeling because of a
threat of recession could cause Masco's leverage ratios to remain above 5.5x
for the year--a level we consider very weak for the current rating.

Under our base case scenario, we expect:
-- Improved housing starts, with 760,000 and 920,000 in 2012 and 2013,
respectively,
-- Unemployment to remain above 8% through 2013, and
-- GDP growth of approximately 2% in 2012 and 2013.

Based on these assumptions, we expect Masco's debt leverage to be between 5x
and 5.5x at the end of 2012, despite debt reduction of over $400 million
during the year. We believe Masco's credit measures could improve further to
below 4.5x in 2013, but still remain well above pre-downturn levels,
particularly if housing starts recover as projected. Under this scenario, we
think Masco could generate about $450 million of cash from operations in 2012.
We estimate current total leverage (adjusted for operating leases and post
retirement obligations) at about 5.8x versus 6.5x on June 30, 2012. For 2013,
if housing starts improve to about 900,000 and the economy continues its slow
recovery, we think Masco's sales could increase 10% and cash from operations
could be $575 million to $600 million, more than sufficient to fund an
additional $200 million debt maturity, capital expenditures of about $150
million, and dividends of about $110 million. However, key risks in this
forecast include a pause or retraction in housing start growth, increased
economic weakness in Europe where Masco derives about one-quarter of its
revenues, and the potential impact of continued high unemployment on consumer
remodeling spending.

Our 'BBB-' corporate credit ratings reflects our view of the company's
"satisfactory" business risk. This assessment incorporates its leading market
positions in a broad range of brand-name products in the home improvement and
residential construction markets and its extensive and diverse distribution
network. Our rating also reflects our view of Masco's "significant" financial
risk--including cash and revolving credit facility availability totaling about
$1.9 billion (after paying off the company's $791 million notes which matured
in July 2012). The company has demonstrated an ability to generate free cash
flow even during a severe downturn, and it has maintained very prudent
financial policies since the housing and construction markets weakened in
2007. We continue to view the company's liquidity position as "strong," which
provides some cushion relative to its low-investment-grade rating.

Masco has a broad portfolio of product offerings, including faucets, kitchen
and bath cabinets, plumbing fittings, paints, and vinyl windows. In addition,
the company has a large installation services business. Although sales are
spread fairly evenly across Masco's segments, plumbing products and decorative
architectural products have provided the bulk of the earnings during the
prolonged period of low housing starts which began in 2008.

Liquidity
In our opinion, Masco maintains a strong liquidity profile based on the
following observations and assumptions:

-- We expect sources of liquidity to cover identified uses by at least
1.5x over the next 12 months and for sources to at least fully cover uses
through an additional 12 months.
-- We expect sources to exceed uses even if forecasted EBITDA declines by
30%.
-- We view Masco's relationships with its lenders to be solid based on
its demonstrated ability to obtain and maintain committed revolving credit
through adverse business and credit cycles.
-- The company's sizable cash balance and its largely undrawn credit
facility should provide capacity to absorb high-impact, low-probability events.

Sources of liquidity include roughly $1.1 billion of unrestricted cash and
cash investments as of June 30, 2012, adjusted for the July 2012 reduction of
its $791 million note maturity. We estimate that Masco also maintained about
$900 million of capacity (net of letters of credit and covenant limitations)
on its $1.25 billion revolving credit facility due in January 2014. Masco was
comfortably in compliance with related debt to capital and interest coverage
covenants at the end of the fiscal quarter and we expect it to remain in
compliance with adequate cushion.

Uses of liquidity in 2012 included $800 million of debt maturities which have
already been paid and $200 million due in 2013. Recurring capital expenditures
are manageable at about $150 million per year and we expect it to remain at
about this level until markets recover.

We expect dividends to total about $110 million per year. We do not expect any
significant share repurchase or acquisitions in the near term given the
company's policy of maintaining high liquidity during difficult market
conditions.

Outlook
The negative outlook reflects our view that the risks relating to economic
weakness in Europe, continued low levels of consumer remodeling spending, and
that current housing starts could worsen from existing levels, could result in
weaker-than-forecasted operating earnings and credit measures for Masco.

We could lower the rating if Masco's credit measures do not improve over the
next several quarters as a result of weaker earnings, further economic
weakness in its European markets, or lower-than-expected housing starts and
remodeling activity. We would also lower the ratings if our view of future
housing starts and other macro-economic conditions changes, and we believe it
unlikely that Masco could reduce debt leverage to about 5x over the next
several quarters and to 4.5x or lower by the end of 2013. In addition, we
could also lower the rating if total liquidity (defined as cash on hand and
availability under credit lines) falls below $1 billion as a result of the
company needing to fund ongoing operating losses.

Although we are unlikely to raise the rating over the next 12 months because
of our expectation for a slow recovery in repair and remodeling spending and
still-low-levels of housing starts, we could upgrade Masco if the market
recovers quicker than we anticipated, resulting in key credit measures
improving to pre-downturn levels. This would include leverage of about 3x and
funds from operations to debt of greater than 25%, which could occur if
housing starts approached the 1 million annual level.
Related Criteria And Research
-- Key Credit Factors: Business And Financial Risks In The Global
Building Products And Materials Industry, Nov. 19, 2008
-- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008

Ratings List
Ratings Affirmed; Outlook Negative
To From
Masco Corp.
Corporate Credit Rating BBB-/Negative/-- BBB-/Stable/--
Senior Unsecured BBB-