-- 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.
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.
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
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
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
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
-- 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.
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
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
RPM International Inc.
Corporate Credit Rating BBB-/Stable/--
RPM International Inc.
Senior Unsecured BBB-
RPM International Inc.
Proposed $250 mil notes due 2022 BBB-