Fitch Affirms RPM's IDR at 'BBB'; Outlook Stable.
KEY RATING DRIVERS
Growth Through Acquisition Strategy: Since 2006, the company has spent about $1.8 billion on acquisitions, including $254.2 million in fiscal year (FY) 2017 (ending May 31), $52 million in FY2016 and $72.7 million during FY2015. During the first six months of FY2018 (ending Nov. 30), RPM spent about $54.6 million on acquisitions. Fitch believes that RPM employs a disciplined process and acquires businesses with strong margins in markets they are familiar with. The company typically targets small, bolt-on acquisitions that are usually adjacent products and/or geographic extensions. Fitch expects RPM will continue to pursue acquisitions as part of its growth strategy.
Credit Metrics: The company's credit metrics have been relatively stable over the past cycle. In particular, RPM's leverage has stayed within a narrow band during FY2003-FY2016, with debt/EBITDA situated between 2.2x and 2.8x during this time period.
RPM's leverage has recently been elevated due to higher debt levels associated with completed acquisitions, the company's decision to pre-pay (in May 2017) the $120 million contribution to the asbestos trust required to be made in December 2017, and RPM's election to accelerate its FY2018 planned pension contribution of $52.8 million in May 2017. Debt/EBITDA was 3.0x for the LTM ending Nov. 30, 2017, compared with 3.1x at FYE2017 and up from 2.3x at FYE2016. FFO-adjusted leverage was 3.9x for the Nov. 30, 2017 LTM period compared with 4.0x at FYE2017 and 3.3x at FYE2016. Interest coverage (EBITDA/interest paid) remains strong at 8.3x. Fitch expects debt/EBITDA will settle at around 2.7x while FFO-adjusted leverage will be about 3.5x at FYE2018.
Asbestos Contributions: On Dec. 10, 2014, a bankruptcy plan was confirmed for RPM's subsidiary, Bondex International Inc. and its parent, Specialty Products Holding Corp. (SPHC), effective Dec. 23, 2014, allowing the subsidiaries to emerge from bankruptcy (filed in May 2010). In accordance with the bankruptcy plan, a trust was established under Section 524(g) of the U.S. Bankruptcy Code for the benefit of current and future asbestos personal-injury claimants. The trust assumed all liability and responsibility for current and future personal injury claims, and the entities will have no further liability or responsibility for and will be permanently protected from such asbestos claims. The trust was initially funded with $450 million in cash and a promissory note, bearing no interest and maturing on or before the fourth anniversary of the effective date. RPM made cash payments of $102.5 million on Dec. 23, 2016 and $119.1 million on May 25, 2017. A final payment of $125 million (in cash, RPM stock or a combination thereof) is due on or before Dec. 23, 2018. The contributions to the trust are deductible for U.S. income tax purposes.
Consistent FCF Generation: RPM generated $56 million of FCF (1.1% of revenues) for the LTM ending Nov. 30, 2017 compared with $103 million (2.1%) during FY2017, $213 million (4.4%) during FY2016 and $109 million (2.4%) during FY2015. FCF for the LTM period and FY2017 includes the planned FY2018 pension contribution made in May 2017. Fitch expects the company will generate FCF of about 2.5%-3.5% of revenues during the next few years.
Product and End-Market Diversity: The company has a well-balanced portfolio of products, including high-quality specialty paints, protective coatings, roofing systems, sealants and adhesives.
--Within its Industrial segment (52% of FY2017 revenues), management estimates that 50% of its sales are directed to the commercial and industrial repair and maintenance sector, while 50% are directed to the new commercial construction market.
--In its Consumer segment (34% of FY2017 revenues), 85% of sales are directed to the repair and maintenance sector while new residential accounted for the remaining 15%.
--Within its Specialty segment (14% of FY2017 revenues), about 50% of revenues come from specialty OEM markets, 40% from the repair and maintenance sector and 10% from the new commercial construction market.
Management estimates that approximately 36% of RPM's net sales are generated from international markets.
RPM's End-Market Cyclicality: RPM is exposed to cyclical end markets, including new residential and commercial construction and residential and commercial repair and maintenance. Management estimates that approximately 70% of worldwide sales are directed toward the repair and maintenance market, which is somewhat less volatile than the new construction market. During the last U.S. economic and construction downturn, RPM's sales fell 7.6% during FY2009, grew 1.3% during FY2010 and then contracted 0.9% during FY2011. RPM's EBITDA margins declined almost 250 bps during FY2009 but rebounded 200 bps during FY2010. Fitch expects continued growth in overall U.S. construction spending through 2018.
SEC Investigation: On Sept. 9, 2016, the SEC filed an enforcement claim against RPM and its General Counsel, Edward Moore, in connection with a 2014 investigation pertaining to the timing of RPM's disclosure and accrual of loss reserves in FY2013 with respect to a previously disclosed GSA and Department of Justice investigation into compliance issues relating to Tremco Roofing Division's GSA contracts. The SEC alleges that Moore, who oversaw RPM's response to the investigation, did not inform RPM's CEO, CFO, Audit Committee, and independent auditors of material facts about the investigation.
This action by the SEC could result in sanctions against RPM and/or its General Counsel and could impose substantial additional costs and distractions.
RPM believes that the allegations mischaracterize both the company's and Moore's actions in connection with this investigation and are without merit. The company's board has stood behind Moore and he continues to serve as the company's general counsel and chief compliance officer. Management indicated that RPM will contest the allegations in the complaint vigorously.
RPM's ratings reflect the company's well-balanced portfolio of products, geographic and end-market diversity, solid liquidity position, stable credit metrics and consistent FCF generation.
RPM's credit metrics are in between those of two other coatings manufacturers rated by Fitch - The Sherwin-Williams Company (BBB/Stable) and PPG Industries, Inc. (A-/Stable). Sherwin-Williams' debt to EBITDA of 5.0x for the LTM ending Sept. 30, 2017 incorporates the company's recent acquisition of Valspar Corporation. Sherwin-Williams' IDR of 'BBB' incorporates Fitch's expectation that Sherwin-Williams will reduce debt and lower leverage following the acquisition, with debt/EBITDA approaching 2.0x by the end of 2019. RPM is significantly smaller in size compared to Sherwin-Williams and PPG.
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- Overall U.S. construction spending grows mid-single-digits during 2018;
- RPM generates FCF margins of about 2.5%-3.5% during the next few years;
- Debt/EBITDA settles at around 2.7x at the end of FY2018 and approximately 2.5x at FYE2019;
- FFO-adjusted leverage is around 3.5x and interest coverage remains above 8.0x during FY2018 and FY2019.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A sustained erosion of profits and cash flows due to weak residential and commercial construction activity, loss of market share, or as the result of long-term higher raw material costs, leading to EBITDA margins sustained below 12%, debt/EBITDA sustained above 2.5x, FFO-adjusted leverage consistently exceeding 3.5x, and interest coverage below 6x;
- Leveraged acquisitions which result in debt/EBITDA sustainably over 2.5x and FFO-adjusted leverage above 3.5x for an extended period.
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- These include debt reduction and/or EBITDA/FFO growth, resulting in sustained improvement in credit metrics, including debt/EBITDA consistently below 2x, FFO-adjusted leverage sustained under 3x, and EBITDA/interest coverage above 9x on a continuing basis.
RPM has solid liquidity and is able to meet its financial obligations, including the remaining instalment of the asbestos trust. As of Nov. 30, 2017, the company had cash of $267.9 million (of which $225.4 million was held at various foreign subsidiaries) and $553.9 million of borrowing availability under its $800 million unsecured revolving credit facility that matures in December 2019.
The company's debt maturities are well-laddered. In December 2017, RPM issued $300 million in 30-year unsecured notes. The company intends to use proceeds from the notes offering to repay, redeem or refinance its $250 million notes maturing in February 2018 and for general corporate purposes. The next major maturity is October 2019, when $450 million in senior notes becomes due. As mentioned earlier, the company is required to make a contribution of $125 million (in cash, stock or a combination of both) to the asbestos trust in December 2018.
FULL LIST OF RATING ACTIONS
Fitch affirms the following ratings:
RPM International Inc.
- Long-Term IDR at 'BBB';
- Senior unsecured debt at 'BBB';
- Unsecured revolving credit facility at 'BBB'.
The Rating Outlook is Stable.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Mar 28, 2018|
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