TEXT - S&P rates Sherwin-Williams notes 'A'

Tue Dec 4, 2012 12:26pm EST

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Overview
     -- Cleveland, Ohio-based coatings producer Sherwin-Williams Co.   
plans to issue $750 million in notes due 2017 and 2042.  
     -- We assigned our 'A' issue rating to the company's proposed $750 
million notes with 2017 and 2042 maturities. 
     -- We affirmed all existing ratings and removed them from CreditWatch, 
where we placed them on Nov. 13, 2012. 
     -- The outlook is negative.  
 
Rating Action
On Dec. 4, 2012, Standard & Poor's Ratings Services affirmed all of its 
ratings on Sherwin-Williams Co., including the 'A' corporate credit rating, 
and removed them from CreditWatch, where we placed them with negative 
implications on Nov. 13, 2012. The outlook is negative. 

We also assigned an 'A' issue rating to the company's proposed $750 million 
notes due 2017 and 2042. The company will use proceeds from the notes issue to 
fund a portion of the Comex acquisition. 

The November CreditWatch placement followed the company's agreement to acquire 
Mexico-based Consorcio Comex S.A. de C.V. for about $2.34 billion, including 
assumed debt, in an all-cash transaction. The company expects to complete the 
acquisition--which is subject to certain conditions and customary regulatory 
approvals--in the first quarter of 2013.

Rationale

The affirmations and CreditWatch removals followed the completion of our 
review of Sherwin-Williams' business and financial risk profile, proforma for 
the acquisition of Comex, which it recently agreed to acquire for $2.34 
billion. The affirmation reflects our view that Sherwin-Williams should be 
able to restore its credit metrics to appropriate levels by 2014. Our belief 
is by discretionary cash flows prioritized for debt reduction and steady 
earnings growth. We revised the company's financial risk profile to 
"intermediate" from "modest", as this acquisition will stretch 
Sherwin-Williams' financial risk profile in 2013. However, our expectations 
are for underlying business and macroeconomic conditions to continue to 
strengthen so that the financial profile can be steadily improved. In 
addition, we do not expect additional major acquisitions or shareholder 
initiatives in the near term that add pressure to the financial profile. 

Comex is a privately held business with operations in Latin America, the U.S., 
and Canada. In 2011, Comex had total annual sales of $1.4 billion, 66% of 
which were generated in Latin America. We believe the acquisition of Comex 
would solidify Sherwin-Williams' strong business risk profile by expanding its 
geographic footprint in architectural coatings, particularly in Latin America. 

The ratings on Cleveland, Ohio-based Sherwin-Williams Co. combine its "strong" 
business risk profile as the leading North American coatings producer and its 
"intermediate" financial risk profile reflected in stable operating margins 
and strong discretionary cash flow. The company continues to perform well in a 
mature and consolidating industry. The ratings and outlook reflect Standard & 
Poor's Ratings Services' view that the U.S. housing market has stabilized and 
is gradually recovering. Ongoing litigation regarding lead paint represents a 
risk that we believe should not represent a serious threat to credit quality. 

With 2011 proforma sales of over $10 billion, Sherwin-Williams manufactures 
paints and coatings and distributes them through company-owned stores and 
other retail outlets. The majority of sales are to architectural end markets 
(primarily repainting, as opposed to new construction), but industrial, 
marine, and infrastructure markets are also important. Although sales are 
heavily weighted to domestic markets, the company has a growing international 
presence that will benefit from the Comex acquisition (it will double the size 
of the company's Latin American business). 

Sherwin-Williams' sales model of company-owned stores (which cater primarily 
to professional contractors) is one of its key business strengths. Other 
business attributes include strong product innovation and leading brands 
(including Sherwin-Williams, Minwax, Krylon, Thompson's WaterSeal, and Dutch 
Boy). Professional contractors tend to value product quality more than 
participants in the do-it-yourself market and are, therefore, generally 
receptive to Sherwin-Williams' high-end products. A knowledgeable sales staff, 
a high degree of customer service, and low employee turnover support this 
business model. Sherwin-Williams also sells branded and private-label paints, 
stains, varnishes, and other products to mass merchandisers, home centers, and 
other retailers.

Improved earnings in the first nine months of 2012 reflect volume growth and 
price increases to pass through raw material cost inflation in resins (like 
propylene) and pigments (for example, titanium dioxide), compared with the 
corresponding period in 2011. We expect sales and earnings to continue to 
benefit from a gradual recovery in demand, and new store openings. EBITDA 
margins have been relatively stable over the past few years, and we expect 
this to continue. Pretax return on capital, currently about 25%, remains 
robust and in line with the rating. We expect the company to achieve synergies 
related to the acquired Comex operations of about 5% of sales, and consolidate 
the two companies' brands in the U.S.

With good profitability and low capital spending requirements, 
Sherwin-Williams generates strong free cash flow. At Sept. 30, 2012, the 
company's credit measures were above par with funds from operations 
(FFO)-to-total adjusted debt at 52%. We adjust debt to include roughly $1 
billion in capitalized operating leases and after-tax environmental and 
underfunded postretirement liabilities.

Following the Comex acquisition, debt leverage will increase in 2013 to a 
level beyond what we consider consistent with the current ratings, with 
FFO-to-total adjusted debt deteriorating to about 30% in 2013. However, based 
on management's long standing financial policy objectives, we believe that 
Sherwin-Williams will apply discretionary cash flows primarily to debt 
reduction in order to improve to its financial profile with FFO-to-total 
adjusted debt improving to the appropriate 40% to 45% range by the end of 
2014. Sherwin-Williams' financial policy is a key factor in maintaining the 
rating. We expect management to maintain annual dividend outlays but reduce 
the level of share repurchases and limit additional acquisitions in the next 
few years. Although some high-profile lead paint lawsuits have been resolved 
in the company's favor, it remains involved in lead paint litigation. The 
ratings and outlook reflect our expectation that pending cases will not result 
in additional material liabilities for Sherwin-Williams.

Liquidity

Sherwin-Williams has "adequate" liquidity, and we expect liquidity sources and 
discretionary cash flow to remain ample to meet all foreseeable cash needs, 
including seasonal working capital fluctuations, annual capital spending, 
dividends, and likely low pension and postretirement funding needs.

At Sept. 30, 2012, the company had $55 million in cash and equivalents and 
ample availability under its $2.05 billion revolving credit facilities with 
maturities in 2015, 2016, and 2017. Commercial paper outstanding was $260 
million at Sept. 30, 2012. 

Other relevant assumptions in our assessment of the company's liquidity 
profile include:
     -- 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, and 
     -- Minimal debt maturities until December 2014, when about $500 million 
in debt matures.
 
Outlook

The outlook is negative. Sherwin-Williams' commanding market position, strong 
discretionary cash flow, and prudent financial policies support the rating. We 
could lower the ratings if the company makes another large debt-financed 
acquisition during the next 24 months, if an economic setback reduces demand 
for architectural and industrial coatings, or if litigation requires major 
cash outlays that would cause FFO-to-debt to fail to improve toward the 
appropriate 40% to 45% range.  

We could revise the outlook to stable if credit measures improve to 
appropriate levels, as the company successfully integrates the Comex 
acquisition, and the housing recovery gains momentum.   

Related Criteria And Research 
     -- Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, 
Sept. 18, 2012 
     -- Key Credit Factors: Business and Financial Risks In The Commodity And 
Specialty Chemical Industry, Nov. 20, 2008
 
Ratings List

Ratings Affirmed; CreditWatch/Outlook Action
                                        To                 From
Sherwin-Williams Co.
 Corporate Credit Rating                A/Negative/A-1     A/Watch Neg/A-1

Sherwin-Williams Co.
 Senior Unsecured                       A                  A/Watch Neg
 Commercial Paper                       A-1                A-1/Watch Neg

New Rating

Sherwin-Williams Co.
 $750 mil. senior unsec nts 
  due 2017 and 2042                     A
FILED UNDER:
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