Fitch Affirms PPG's IDR at 'A-'; Outlook Stable

CHICAGO--()--Fitch Ratings has affirmed the ratings of PPG Industries, Inc. (NYSE: PPG), including the company's Issuer Default Rating (IDR), at 'A-', following the completion of its previously announced acquisition of Consorcio Comex, S.A. de C.V. (Comex) on Nov. 5, 2014 for $2.3 billion.

Fitch has also assigned an 'A-' rating to PPG's proposed offering of $300 million 5-year senior unsecured notes. Proceeds from the notes offering, together with cash on hand, will be used to fund the repurchase of $150 million of its 9% debentures due 2021 and $250 million of its 7.7% senior notes due 2038 pursuant to a tender offer for these notes.

The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The rating affirmation reflects a geographically well-balanced company with a heightened focus on its coatings businesses, leading market positions in all of its coatings end-markets, consistent robust earnings, and excellent free cash flow (FCF) generation. Risk factors include the cyclicality of most of PPG's end-markets, aggressive growth strategy, and the company's exposure to asbestos litigation.

The rating affirmation also incorporates Fitch's expectation that PPG's credit metrics will remain relatively stable following the acquisition. PPG funded the acquisition primarily using currently held cash and short-term investments ($3.04 billion as of Sept. 30, 2014) and some short-term borrowings. Fitch projects PPG's leverage as measured by debt to EBITDA will settle between 1.5x to 1.75x at year-end 2014, compared with 1.4x at the conclusion of 2013.

The Stable Outlook reflects PPG's strong liquidity position, management's consistent and disciplined capital allocation strategy, and Fitch's expectation of a moderate improvement in most of PPG's end-markets in 2014 and 2015.

COMEX ACQUISITION AND RATIONALE

Founded in 1952, Comex is a privately held architectural and industrial coatings company headquartered in Mexico City, Mexico. The company manufactures coatings and related products in Mexico and sells them in Mexico and Central America through approximately 3,700 stores that are independently owned and operated by more than 700 concessionaires (independent dealers). Comex also sells its products through regional retailers, wholesalers and direct sales customers. The company has approximately 3,900 employees, eight manufacturing facilities and six distribution centers, and had sales of approximately $1 billion in 2013.

Fitch views this transaction as strategically positive for PPG. The acquisition adds a leading architectural coatings business in Mexico and Central America, a region where PPG has limited architectural coatings presence. Additionally, the Comex operation enables PPG to expand its industrial coatings business in the region. The proposed acquisition is also consistent with PPG's stated strategy of expanding its global coatings business portfolio.

Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SigmaKalon in 2008, divestiture of the commodity chemicals business in early 2013, acquisition of the North American architectural coatings business of Akzo Nobel N.V. Amsterdam in April 2013, divestiture of its 51% interest in the Transitions Optical joint venture to Essilor International, and the proposed acquisition of Comex further reflect PPG's transformation into primarily a coatings company.

SOLID LIQUIDITY AND FREE CASH FLOW GENERATION

As of Sept. 30, 2014, the company had $2.47 billion of unrestricted cash, $570 million of short-term investments and no borrowings under its $1.2 billion revolving credit facility.

Fitch believes that the company will continue to have sufficient liquidity following completion of the Comex acquisition to meet financial obligations, which include Eur300 million of notes maturing in mid-2015 as well as obligations from its asbestos litigation, should the asbestos settlement become effective.

PPG also generates strong FCF. For the latest-12-month (LTM) period ending Sept. 30, 2014, the company generated $545 million of FCF, compared with $841 million during 2013, $1.02 billion during 2012 and $691 million during 2011. Fitch expects FCF will represent approximately 4%-5% of sales in 2014 and 2015.

DISCIPLINED CAPITAL ALLOCATION STRATEGY

The company has been consistent in prioritizing the use of its cash and FCF, with the goal of strengthening its core businesses and providing benefits to its shareholders. At times, the company has been aggressive in repurchasing stock, particularly when the company did not find suitable acquisition opportunities. However, in the past, PPG has shown discipline in pulling back on share repurchases following a sizeable acquisition in an effort to reduce debt.

In April 2014, PPG announced a 10% increase in quarterly dividend payments effective in June 2014. In October 2011, the board authorized a repurchase program under which the company has repurchased about 10 million shares totaling roughly $1.65 billion. In April 2014, the company's board authorized a new $2 billion share repurchase program. Fitch believes that the company has the ability to fund moderate share repurchases without straining its liquidity position.

CREDIT METRICS

Leverage at the end of the September 2014 quarter was 1.4x, flat from year-end 2013. EBITDA-to-interest was 12x for the Sept. 30, 2014 LTM period compared with 11.5x during 2013.

Fitch expects leverage will increase slightly at the end of 2014 but will remain appropriate for the current rating. Fitch projects leverage will settle between 1.5x-1.75x at year-end 2014, depending on the amount of debt issued for the acquisition. Fitch projects PPG's leverage will be at or below 1.5x at the end of 2015, and that interest coverage will remain above 12x during 2014 and 2015.

RATING SENSITIVITIES

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.

While Fitch does not currently anticipate a positive rating action in the next 12-18 months, one may be considered if the company's credit metrics improve meaningfully from current levels, including leverage consistently in the 1x-1.5x range; interest coverage steadily above 15x; and if PPG maintains a high cash balance until its asbestos liabilities are settled.

Negative rating actions could occur if the recovery in PPG's various end-markets dissipates and affects volumes, and/or sustained materials and energy cost pressures contract margins, leading to weaker than expected financial results and credit metrics, including: pro forma revenue decline of 10%; EBITDA margins falling to between 11%-12%, and leverage levels consistently above 2x. Additionally, Fitch may also consider a negative rating action if management takes on another sizeable acquisition and/or undertakes a meaningful share repurchase program funded by debt, resulting in consistent debt-to-EBITDA levels above 2x.

Fitch has affirmed the following ratings for PPG with a Stable Outlook:

--Long-term IDR at 'A-';

--Senior unsecured debt at 'A-';

--Unsecured revolving credit facility at 'A-';

--Short-term IDR at 'F2';

--Commercial paper at 'F2'.

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

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=917055

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
Wesley Moultrie
Managing Director
+1-312-368-3186
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
Wesley Moultrie
Managing Director
+1-312-368-3186
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com