(The following statement was released by the rating agency)
CHICAGO, May 10 (Fitch) Fitch Ratings has downgraded The
Company's (NYSE: SHW) ratings, including the company's Issuer
(IDR) to 'A-' from 'A'. Fitch has also removed SHW's ratings
from Rating Watch
Negative. The Rating Outlook is Stable. A complete list of
follows at the end of this release.
Fitch had originally placed the company's ratings on Watch
Negative in November
2012 following SHW's proposed acquisition of Consorcio Comex,
S.A. de C.V.
(Comex) for $2.34 billion, including assumed debt, in an all
The transaction is expected to close during the latter part of
quarter of 2013.
KEY RATING DRIVERS
The ratings downgrade reflects SHW's high leverage following the
Comex and integration risks associated with this large
transaction and takes
into account normalized leverage post integration. While the
successfully integrated smaller acquisitions in the past (i.e.
M.A. Bruder), there is greater risk as the Comex acquisition is
larger and also involves meaningful operations in foreign
Leverage as measured by debt to EBITDA is projected to peak at
at the end of the 2013 second quarter, once the acquisition of
completed (without any contribution from Comex). Lease-adjusted
(adjusted debt to EBITDAR) is projected to be roughly
3.5x-3.75x. This compares
to debt to EBITDA of 1x and lease-adjusted leverage in the 2x
range prior to
this acquisition. Fitch expects SHW will reduce its debt levels
in the next 24
months and will lower its debt to EBITDA to below 1.5x at
year-end 2014 and will
further reduce this ratio to roughly 1.2x by the end of 2015.
lease-adjusted leverage is forecast to decline to 2.7x at
year-end 2014 and 2.5x
at year-end 2015.
The ratings also incorporate the company's leading market
position in the
architectural coatings industry, the company's unique
distribution platform, the
breadth and depth of its product offerings, the company's focus
contractors and property maintenance managers, solid free cash
and strong management team. Risk factors include lead-based
cases against SHW, volatile raw materials costs and the
aggressive growth strategy.
The Stable Outlook reflects the expected continued improvement
in housing (new
and existing), home improvement and commercial construction
markets in the U.S.
during 2013. The Stable Outlook also reflects the company's
position and strong performance during 2012 and so far in 2013.
Comex is a privately held business with operations in Latin
America, the U.S.
and Canada. In 2011, the company had $1.4 billion of sales, 66%
of which was
generated in Mexico and the remaining 34% in the U.S. and
manufactures and sells architectural and industrial coatings in
3,300 points of sale operated by 750 independent
concessionaires. In the U.S.,
Comex sells paint and coatings products under a variety of brand
240 company-operated paint stores. In Canada, the company
brands of paint and coatings through 78 company-operated paint
approximately 1,500 independent paint dealers.
The proposed acquisition has good strategic rationale for SHW.
augments its current business mix and provides the company with
controlled distribution platform in Mexico, the western U.S. and
its store count is currently low. The acquisition also improves
throughout Latin America and provides the company with strong
brand names in
LIQUIDITY AND CASH FLOW GENERATION
SHW maintains ample liquidity with cash of $613.9 million as of
March 31, 2013
and no borrowings under its $1.05 billion CP Program (that is
backed by SHW's
$1.05 billion revolving credit facility). SHW also has three
letter of credit facilities totaling $1 billion, a EUR95 million
credit facility and a C$150 Canadian credit facility.
Cash flow generation remains strong with free cash flow (FCF)
million for the LTM period ending March 31, 2013. FCF totaled
$569.8 million in
2012, $428.6 million in 2011, $425 million in 2010, $605.3
million in 2009,
$593.9 million in 2008, and $546.3 million in 2007. Fitch
expects SHW to
generate $450 million to $500 million of FCF during 2013.
SHW has a long track record of adhering to a disciplined
financial strategy and
Fitch expects this to continue. The company has also
demonstrated in the past
that it can successfully delever its balance sheet following
In 2004, SHW completed two large acquisitions totaling $640
resulted in its debt to EBITDA ratio increasing from 0.7x for
the LTM period
ending June 30, 2004 to 1.25x for the LTM period ending March
31, 2005. The
company quickly reduced its leverage to 0.7x by the end of 2005.
The company has historically used excess FCF to repurchase its
stock and/or fund
acquisitions. SHW's share repurchases totaled $557.8 million in
million in 2011, $375 million in 2010 and $530 million in 2009.
Comex acquisition, Fitch expects the company will lower its
relative to previous years and use excess FCF to pay down debt.
IMPROVEMENT IN SHW'S U.S. END-MARKETS
Fitch's ratings on SHW take into account the cyclicality of the
markets. Residential, commercial and industrial construction are
and can be influenced by economic trends.
The housing recovery should advance this year with a continued,
below-trend-line, cyclical rise off a very low bottom. In a
economy with somewhat diminished distressed home sales
competitive rental cost alternatives, local permitting delays,
developed lots less readily available, and new and existing home
historically low levels, 2013 total housing starts should
improve about 18%
925,000, while new home sales increase approximately 22% to
448,000 and existing
home sales grow 7.5% to 5.01 million.
Fitch currently projects home improvement spending will increase
4% in 2013.
Growth patterns in the intermediate term are likely to be below
industry experienced during the previous housing boom and the
early part of the
past decade due to the slower expansion in the U.S. economy and
better housing market conditions.
Non-residential construction is also expected to grow slightly
Fitch expects private non-residential construction spending will
during 2013 while public construction spending is forecast to
increase 2% this
SOLID FINANCIAL RESULTS
SHW reported strong financial results during 2012 and so far in
2012, revenues grew 8.8% compared with 2011 and gross margins
increased 140 bps
year-over-year (YOY). The company's EBITDA margins also showed
improvement, advancing 160 bps to 13.2% during 2012.
This trend continued during the first quarter of 2013 despite
comparisons due to favorable weather conditions during the first
2012. Total revenues increased 1.4% during the first quarter of
the company's paint stores group reported better results, with
sales growing 4%
(3.2% on a same-store basis) during the quarter. Gross margins
margins each improved 180 bps during the quarter. Fitch
currently expects sales
to grow in the mid-single digit percentage range (without Comex)
margins to increase 50-75 bps this year compared with 2012
LEAD-BASED PAINT LITIGATION RISKS
The company (and other companies) are or were defendants in
seeking recovery based on public nuisance liability theories,
theories, brought by the state of Rhode Island, the city of St.
various cities and counties in the State of New Jersey, the
state of Ohio and
various cities in the state of Ohio, the city of Milwaukee,
Wisconsin and the
county of Santa Clara, California and other public entities in
the state of
California. Except for the Santa Clara County, California case,
all of these
legal proceedings have been concluded in favor of the company
defendants at various stages in the proceedings. The trial for
the Santa Clara
case is set to begin in June 2013. The potential liability
related to this legal
proceeding cannot be determined at this time.
The company's ratings are constrained in the near term because
of the high
leverage levels following the Comex acquisition. Nevertheless, a
action may be considered if SHW's financial performance is
Fitch's current expectations, leading to improved profitability
and FCF, and
lease-adjusted leverage ratio below 2x.
Negative rating actions may be considered if the company
performs in line with
Fitch's 2013/2014 stress case forecasts, including
margins falling to between 11% - 12% and lease-adjusted leverage
exceeding 3x 12-18 months following the completion of the Comex
Additionally, Fitch may consider a negative rating action if
there is an adverse
decision against the company related to outstanding lead-based
cases wherein the judgment will lead to higher debt levels and
leverage above 3x.
Fitch has downgraded SHW's ratings as follows:
--Long-term IDR to 'A-' from 'A';
--Senior unsecured notes to 'A-' from 'A';
--Unsecured bank credit facilities to 'A-' from 'A';
--Short-term IDR to 'F2' from 'F1';
--Commercial Paper (CP) to 'F2' from 'F1'.
The Rating Outlook is Stable.
Robert Rulla, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278,
Additional information is available at www.fitchratings.com.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12,
Applicable Criteria and Related Research
Corporate Rating Methodology
Evaluating Corporate Governance
Liquidity Considerations for Corporate Issuers
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