CHICAGO--(BUSINESS WIRE)--Fitch expects the ratings and Outlook for Masco Corporation (NYSE: MAS), including the company's Issuer Default Rating (IDR) of 'BB' and Positive Outlook, will be unaffected by the company's announcement of a number of strategic initiatives to drive shareholder value.
SPINOFF OF INSTALLATION BUSINESS
Masco announced the spin-off of 100% of its Installation and Other Services businesses into an independent, publicly traded company through a tax-free stock distribution to Masco shareholders. This business had $1.4 billion of revenues in 2013 and $66 million of EBITDA. Masco estimates approximately 80% of this segment's sales go the new home construction market, while repair and remodel accounts for about 20%.
Fitch estimates that the spin-off of this business will increase leverage by about 25 - 30 bps. For the LTM period ending June 30, 2014, debt to EBITDA is estimated to increase from 3.4x to about 3.7x on a pro forma basis. Similarly, interest coverage is estimated to decline from 4.4x to 4.1x for the LTM period ending June 30, 2014.
While the spin-off will result in some loss of EBITDA, Masco's credit profile will benefit from lower exposure to the more volatile new home construction market. Masco estimates that its sales to the new home construction market will be reduced from 28% to 17% once the spin-off is completed.
Masco also announced the implementation of a share repurchase program for an aggregate of 50 million shares of its common stock, representing about $1.2 billion at the current share price. Masco expects to execute the share repurchase program over a multi-year period starting in fourth quarter-2014.
In May 2014, Masco's board approved a 20% increase in its quarterly common stock dividend, from $0.075 per common share to $0.09 per share. The increased dividend was paid in July 2014.
The company remains committed to reducing debt by about $300 - $500 million by 2016. Management has indicated that it is committed to an investment grade rating over the long term and will continue to focus on strengthening the company's balance sheet.
Fitch is comfortable with the company's capital allocation strategy given Masco's liquidity position. The company ended the second-quarter 2014 with cash of $1.2 billion, $228 million of short-term bank deposits and about $1.2 billion of availability under its revolving credit facility. (Note: Of the $1.4 billion of cash and short-term bank deposits, $620 million is held in foreign subsidiaries.) Additionally, Masco expects to receive about $200 million from the spin-off of the Installation business. The company also generates strong free cash flow, totaling about $419 million for the LTM period ending June 30, 2014.
During the past housing downturn, Masco was disciplined with its share repurchase program in order to preserve its liquidity position. Fitch expects the company will pull back on share repurchases to strengthen its liquidity if macro conditions deteriorate.
CORPORATE EXPENSE REDUCTION
Furthermore, Masco is implementing initiatives to reduce corporate costs and simplify its organizational structure. These actions will result in about $30 million of charges over the next several quarters with anticipated company-wide savings of $35 - 40 million annually.
PREVIOUS RATING ACTIONS
In February 2014, Fitch affirmed the ratings of Masco, including the company's Issuer Default Rating (IDR), at 'BB'. The rating Outlook was also revised from Stable to Positive. The Positive Outlook reflected Fitch's expectation that Masco will continue to improve its financial and credit metrics this year, including leverage at roughly 3x and interest coverage of approximately 5x. Fitch now expects the company's leverage will be between 3.0x - 3.5x and interest coverage will be between 4.5x and 5.0x at the end of 2014, and further improvement in these metrics by year-end 2015.
Fitch currently rates Masco as follows with a Positive Outlook:
--Senior unsecured debt 'BB';
--Unsecured revolving credit facility 'BB'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage