July 19 - Fitch Ratings does not expect PPG Industries, Inc.'s
(NYSE: PPG) ratings, including the company's Issuer Default Rating (IDR) of
'A-', to be affected by the separation of its commodity chemicals business.
PPG's commodity chemicals business is a global producer of chlorine, caustic
soda and related chemicals for use in applications such as chemical
manufacturing, pulp and paper production, water treatment, plastics production
and agricultural products, with manufacturing facilities in the U.S., Canada and
Taiwan. This business had $1.7 billion of sales in 2011.
The Rating Outlook is Stable. A complete list of ratings follows at the end of
PPG plans to separate its commodity chemicals business and merge it with Georgia
Gulf Corporation (NYSE: GGC) in a tax-efficient transaction. The transaction
value of approximately $2.1 billion consists of $900 million of cash to be paid
to PPG, approximately $95 million of assumed debt and $87 million of minority
interest, and GGC shares to be received by PPG shareholders (approximately 50.5%
of the newly merged company) valued at $1 billion based on GGC's closing stock
price on July 18, 2012. In the transaction, PPG will transfer related
environmental liabilities, pension assets and other liabilities and other
post-employment benefits obligations to the newly merged company. The
transaction, which is subject to approval by GGC shareholders and relevant tax
authority rulings and regulatory approvals, is expected to occur in late 2012 or
Over the past decade, PPG has revamped its business portfolio to achieve faster
growth, less cyclical growth, and lower capital intensity. This divestiture
allows the company to execute on this strategy and further transform PPG into
primarily a coatings and specialty products company.
While the transaction allows the company to divest a non-core operation in a
tax-efficient manner, this results in the loss of somewhat meaningful EBITDA
(roughly $400 million in 2011) and cash flow for the company. Additionally, the
commodity chemicals business provides some hedge against rising raw materials
costs. During periods of escalating coatings input costs, selling prices for
PPG's commodity chemicals products have also tended to be higher.
The company's credit metrics are also expected to weaken in the near term as it
will take some time for the company to find suitable acquisitions to replace the
EBITDA and cash flows that will be lost from the divestiture. On a pro forma
basis excluding the results from the chemicals business, leverage as measured by
debt to EBITDA is expected to rise above 2.0x for fiscal 2012 from 1.7x at the
end of 2011. Fitch expects leverage will be below 2.0x by year-end 2013 as the
company pays down debt and increases EBITDA from restructuring initiatives begun
over the past few quarters. These ratios remain appropriate for the current
The company has demonstrated in the past that it has the discipline to
prioritize the use of its cash and free cash flow FCF). Following the
acquisition of SigmaKalon (SK) in 2008, the company refrained from making
meaningful share repurchases in 2008 and 2009. The company has also lowered its
leverage levels from the highs seen after the SK acquisition. Debt to EBITDA
declined from 2.8x for the latest 12-month (LTM) period ending March 31, 2008 to
1.6x for the LTM period ending March 31, 2012.
The ratings for PPG reflect a geographically well-balanced company with a
heightened focus on its coatings and optical businesses, consistent strong
earnings, and excellent cash flow. Risk factors include the cyclicality of
certain of PPG's end-markets, often volatile raw materials and energy costs, and
the company's exposure to asbestos litigation.
The Stable Outlook reflects the company's strong liquidity position and
demonstrated ability to generate consistent FCF. PPG ended the June 2012 quarter
with cash of $1 billion and no borrowings under its $1.2 billion revolving
credit facility that matures in August 2013. The company's debt maturities are
also well-laddered, with $47 million of short-term debt and no major debt
maturities until March 2013, when $600 million of senior notes become due. The
transaction will further strengthen the company's strong cash position and will
provide PPG with the opportunity to pursue acquisitions, organic growth
opportunities, debt repayment and share repurchases.
The company continues to generate significant FCF, reporting FCF of $833 million
for the LTM period ending March 31, 2012. This compares to FCF of $691 million
during fiscal 2011, $643 million during fiscal 2010 and $753 million during
fiscal 2009. Fitch expects FCF this year to be comparable to 2011 levels. FCF
will likely be lower in 2013 due to the loss of cash flow from the separation of
the commodity chemicals business.
The company's operations are exposed to the economic difficulties in Europe.
Revenues from EMEA represented roughly 34% of 2011 net sales. Management expects
demand to remain muted in Europe and has implemented restructuring actions to
lower costs in this region.
Future ratings and Outlooks will be influenced by broad end-market trends, as
well as company specific activity, particularly FCF trends and uses and
liquidity position. Over the next 12 months, a positive rating action may be
considered if the company shows significant improvement in its operating
results, leading to sustained improvement in credit metrics (particularly debt
to EBITDA levels in the 1x-1.5x range and interest coverage above 12x), and a
continued robust liquidity profile. Fitch may consider a negative rating action
if there is deterioration in operating results and/or management is unable to
find suitable acquisition targets to replace the EBITDA and cash flow lost from
the planned divestiture of the commodity chemicals business and uses a large
portion of the proceeds for share repurchases, resulting in consistent debt to
EBITDA levels above 2.5x.
Fitch currently rates PPG as follows:
--Long-term IDR 'A-';
--Senior unsecured debt 'A-';
--Unsecured revolving credit facility 'A-';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Liquidity Considerations for Corporate Issuers