CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed RPM International Inc.'s (RPM) Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BBB-'. The Rating Outlook is Stable.
KEY RATING DRIVERS
RPM's ratings reflect the company's balanced portfolio of specialty chemical products including paints and coatings, roofing systems, construction chemicals, sealants and adhesives. The company's industrial segment accounted for 63.5% of the company's reported revenues of $4.2 billion for the latest 12 months (LTM) ended Aug. 31, 2013, with the consumer segment accounting for the remainder. This is a slight shift from the recent past when the split was 70%/30% in favor of industrial. The consumer segment has benefited from a pick-up in North American home store retail and acquisitions.
The majority of RPM's products is geared towards maintenance and repair. This focus mitigates exposure to the weakness of the commercial construction and residential housing (rebounding but still well below historical average building activity) markets and provides the company with more stable revenues and profits.
The ratings incorporate RPM's solid credit profile. The company's leverage remains manageable with gross balance sheet debt to operating EBITDA of 2.7 times (x). Fitch expects that RPM will use its financial flexibility and ability to generate consistent free cash flow to maintain its gross leverage meaningfully below 3.0x. The company's leverage is elevated due to a November debt issuance of $300 million to fund acquisitions. The company has made three acquisitions for nearly $400 million in fiscal 2013. With RPM's expected operating income growth, leverage is expected to trend to the historic norm of 2.5x.
The company had LTM Aug. 31, 2013 free cash flow of $13 million after $89 million capital expenditures and $119 million dividends. RPM's LTM cash flow from operations of $221 million was hampered by its one-time GSA settlement and a step up in working capital related to growing sales. RPM has been consistently free cash flow positive, even through the past recession. Fitch expects RPM to remain free cash flow positive.
The ratings are constrained by the company's growth-through-acquisition strategy. RPM spent $397 million for acquisitions for fiscal 2013, a step up from the company's average of $83 million annually in the previous five fiscal years. This is a deliberate strategy as the company seeks to achieve $5 billion in sales in FY2015. Fitch forecasts acquisitions totaling roughly $400 million for 2014 and 2015 to enable it to achieve its revenue goal. RPM typically funds these acquisitions through a combination of internally generated cash and debt. Fitch expects RPM to limit its debt funding to maintain its current credit profile. The integration risk is mitigated by relatively small-to-medium size of the acquisition targets, which are typically bolt-on in nature and complementary to RPM's existing product portfolio and geographic reach.
The ratings are also limited by RPM's fairly high dividend payout. RPM paid $119 million dividends to its shareholders over the past 12 months. The payout totals more than 50% of the company's cash flow from operations over the same period of time.
The Stable Outlook reflects Fitch's expectation that the company will maintain total debt to EBITDA of 2.5x on a sustained basis as well as generate meaningful free cash flow through business cycles.
At Aug. 31, 2013, RPM had robust liquidity of $896 million, consisting of approximately $205 million cash on-hand, $541 million available under the company's $600 million senior unsecured revolving credit facility maturing June 2017 and full availability under its $150 million accounts receivables securitization program.
RPM's revolving credit facility has two financial covenants: a debt-to-capital maximum of 60% and an EBITDA interest coverage minimum of 3.5x with a carveouts for $15 million of acquisition-related costs, $25 million for noncash charges and income attributable to equity in affiliates annually. At Aug. 31, 2013, RPM was in compliance with these financial covenants. As calculated under the facility, debt to capital stood at 53.1% and EBITDA interest coverage at 5.8x. Fitch expects RPM to remain in compliance with these covenants over the lifetime of the facility.
The company's debt maturity profile is manageable. The next major maturity is the company's $200 million 6.25% senior unsecured notes due in December 2013. Fitch expects the notes to be refinanced. Subsequent major maturities are $150 million in 2015, $250 million in 2018 and $450 million in 2019.
A subsidiary of RPM has exposure to asbestos claims. On May 31, 2010, Bondex International Inc., a subsidiary of RPM, and its direct holding company, Specialty Products Holding Corp. (SPHC) filed for Chapter 11 bankruptcy protection to resolve all pending and future asbestos lawsuits. Neither RPM International nor any operating subsidiaries were part of the filing. The Chapter 11 filings target to establish a section 524(g) trust that will compensate existing and future asbestos claims. The trust could be funded through the sale of SPHC either back to RPM International or to a third party at the end of the Chapter 11 proceedings. If approved by the bankruptcy court, it isolates all asbestos claims to the 524 (g) trust. In addition, any future asbestos claims against Bondex, SPHC or RPM International would be channeled to the 524 (g) trust by a permanent injunction. SPHC has a $40 million debtor-in-possession financing in place in order to fund its Chapter 11 proceedings, which are pending.
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
--A permanent resolution of the asbestos liabilities.
--Significant debt reduction relative to cash flow, with total debt to EBITDA below 2.0x on a continuing basis.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
--Failure to resolve the asbestos liabilities which results in a meaningful increase of asbestos-related cash outflows.
--A sustained erosion of profits and cash flows either due to a step change in key end-user markets or as the result of long-term higher raw material costs.
--Leveraged acquisitions which result in debt to EBITDA sustainably over 3.0x.
--Dividends that claim most internally generated cash flow.
The following ratings for RPM International Inc. were affirmed:
--Long-term IDR at 'BBB-';
--Senior unsecured bank credit facility at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (August 2013);
--'Rating Chemical Companies,' (August 2012).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating Chemical Companies