TEXT-S&P affirms RPM International ratings
Overview -- We are assigning a 'BBB-' senior unsecured debt rating to RPM International Inc.'s proposed $250 million senior unsecured notes due 2022. -- We affirmed all of our existing ratings on RPM, including the 'BBB-' corporate credit rating. -- The stable outlook reflects our expectations for gradual earnings growth, supported by an ongoing economic recovery. Rating Action On Oct. 18, 2012, Standard & Poor's Ratings Services assigned its 'BBB-' issue rating to Medina, Ohio-based RPM International Inc.'s (RPM) proposed $250 million of senior unsecured notes due 2022. At the same time, we affirmed all of our ratings on RPM, including the 'BBB-' corporate credit rating (see ratings list). The outlook is stable. The senior unsecured notes will be drawn down from the company's existing shelf registration, and RPM will use the proceeds to repay a portion of the outstanding borrowings under its revolving credit facility. Rationale The ratings on RPM International Inc. incorporate the company's diverse specialty coatings and materials businesses, as well as its high level of maintenance, repair, and renovation sales, which provide a meaningful degree of stability to earnings. The ratings also reflect the company's proven ability to integrate a continuous flow of small- to midsize company and product-line acquisitions, and cash flow protection measures appropriate for the ratings. The use of debt to help fund acquisitions and relatively low discretionary cash flows temper those strengths. Standard & Poor's characterizes RPM's business risk profile as "strong" and its financial risk profile as "significant". RPM's businesses are well balanced between industrial and consumer end markets, have strong brands, and hold leading positions in relatively stable niches in the protective coatings industry. The industrial segment represents about two-thirds of revenues, and the consumer segment accounts for the balance. RPM's internal growth factors include the ongoing introduction of new industrial and commercial products, the cross-selling of industrial product offerings, and geographic expansion. Continuing growth in international markets is another positive, with the company generating approximately 41% of fiscal 2012 revenues outside the U.S. Well-known brand names include Rust-Oleum (rust preventive coatings), Tremco (roofing and sealant products), Carboline (corrosion control products), Stonhard (flooring systems), and DAP (caulks and sealants). Industrial capital spending and outlays for maintenance and replacement projects are some of the key determinants of industrial segment operating results, and industrial sales volumes rose 1% in the first quarter of fiscal 2013 (ended Aug. 31). Retail customers typically use RPM's consumer products (mainly a North American business) for home maintenance, renovation, or remodeling, as opposed to new construction--a good business indicator for the consumer segment is housing turnover, with its influence on remodeling activity. Segment volumes rose by 5% in the first quarter of fiscal 2013 over the corresponding period in fiscal 2012, against a backdrop of gradual improvement in existing home sales and new construction, and in retail consumer spending. Overall, consolidated EBITDA margins are reasonable at 13%, with return on capital of 14%. Acquisitions have complemented company offerings, supporting RPM's overall favorable earnings record. During the first quarter of fiscal 2013, the company completed acquisitions totaling $141 million. Subsequent to the fiscal quarter end, RPM completed two acquisitions in September, Kirker Enterprises Inc. (not rated) with annual sales of $100 million, and Synta Inc. (not rated) with annual sales of $40 million. The key ratio of funds from operations (FFO)-to-total debt (which we adjusted for capitalized operating leases and unfunded pension obligations) was about 23% as of Aug. 31, 2012. We consider FFO-to-total debt in the 20% to 25% range to be appropriate for the current rating. RPM has indicated that it's targeting $1 billion in acquisitions through 2015 as part of its overall growth strategy, and we expect that management will be prudent regarding plans for future acquisitions and shareholder rewards. In May 2010, RPM's two nonoperating subsidiaries, Bondex International Inc. and Specialty Products Holding Corp. (SPHC), filed for Chapter 11 reorganization to permanently resolve current and future asbestos claims associated with Bondex. RPM's reserve for asbestos liabilities was $434 million as of Feb. 28, 2010, and it had annual asbestos-related pretax cash payments of $60 million to $80 million. Although the removal of the asbestos liabilities from RPM's balance sheet has improved its credit ratios and provides increased free cash generation, we remain mindful about potential lawsuits filed against the company in reaction to the Chapter 11 filing. The funding of a section 524(g) trust could represent a future cash outflow for RPM, though we do not expect that the funding amount would be large enough to warrant reassessment of the ratings. If the trust is established, we would expect a court order to direct all future Bondex-related claims to the trust, which the company expects would compensate only meritorious claims at appropriate values. Liquidity Liquidity is "adequate". As of Aug. 31, 2012, cash and short-term investments totaled $257 million, and RPM had ample availability under its new $600 million revolving credit facility expiring in June 2017. Under the credit agreement, the company could expand the revolving credit facility by $200 million, subject to lender approval. The company also has a $150 million accounts receivable securitization program expiring in May 2014. RPM's business is not capital intensive. We expect capital spending for fiscal 2013 to be about $85 million. The relatively high common dividend limits discretionary cash flows. The company has a favorable debt maturity profile with no meaningful debt maturities until December 2013, when its $200 million unsecured notes are due. Financial covenants include a maximum leverage ratio of 60% and a minimum interest coverage ratio of 3.5x. We expect the company to maintain ample room with respect to covenant compliance. Other relevant assumptions of our assessment of the company's liquidity profile include: -- Sources of liquidity over the next 12 to 24 months will exceed uses by 1.2x or more; -- Net sources should be positive, even with a 20% drop in EBITDA; -- Covenant compliance would also survive a 20% drop in EBITDA; and -- The company would likely absorb low-probability shocks, based on positive cash flow from operations and available liquidity. Outlook The outlook is stable. RPM's strong business risk profile, with a majority of revenues derived from maintenance, repair, and renovation projects, imparts a significant degree of stability to operating margins and earnings. We could raise the ratings if FFO-to-total debt were near 30%, supported by improved operating performance, financial policies that allow credit measures to strengthen, and clarity regarding the extent of potential outlays that RPM could be required to make for the establishment of a trust for the asbestos liabilities. Although we do not expect to do so at this time, we could lower the ratings if revenues decline by well over 10% (after assuming ongoing acquisitions in line with historical levels) and higher raw material prices caused margins to deteriorate by 200 basis points or more from current levels. In such a scenario, FFO-to-total debt would decline to 15% or lower. The ratings could also come under pressure if the company makes larger-than-expected debt-funded acquisitions, with FFO-to-total debt decreasing to less than 15% with no clear prospects for recovery. Related Criteria And Research -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 24, 2012 -- Key Credit Factors: Business and Financial Risks In The Commodity And Specialty Chemical Industry, Nov. 20, 2008 Ratings List Ratings Affirmed RPM International Inc. Corporate Credit Rating BBB-/Stable/-- RPM International Inc. Senior Unsecured BBB- New Rating RPM International Inc. Senior Unsecured Proposed $250 mil notes due 2022 BBB-
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