Fitch Affirms RPM's IDR at 'BBB-'; Outlook Stable

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of RPM International Inc. RPM, including the company's Issuer Default Rating (IDR), at 'BBB-'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.

KEY RATING DRIVERS

The ratings for RPM reflect the company's well-balanced portfolio of products, geographic and end-market diversity, adequate liquidity position, stable credit metrics and consistent free cash flow (FCF) generation. Risks include the cyclicality of the company's end-markets, growth through acquisition strategy, and exposure to asbestos liabilities.

The Stable Outlook reflects Fitch's expectation that the company's construction end markets will continue to improve in 2014 and 2015, leading to modestly higher revenues and cash flow.

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 RPM's Industrial segment (63% of fiscal year 2014 [FY14] revenues), management estimates that 60% of this segment's sales are directed to the commercial and industrial repair and maintenance sector, while 40% are directed to the new commercial construction market. Within its Consumer segment (37% of sales), about 85% of sales are directed to the repair and maintenance sector while new home construction accounts for the remaining 15%. About 43% of RPM's FY14 net sales were generated from international markets.

ASBESTOS LIABILITIES

RPM's subsidiary, Bondex International Inc. (Bondex), and its parent, Specialty Products Holding Corp. (SPHC), are defendants in various asbestos-related bodily injury lawsuits filed in various state courts. On May 31, 2010, Bondex and SPHC filed voluntary petitions in the U.S. Bankruptcy Court in Delaware to reorganize under Chapter 11 of the Bankruptcy Court. The Chapter 11 filings target to establish a trust in accordance with Section 524(g) of the Bankruptcy Code and seek the imposition of a channeling injunction that will direct all present and future Bondex-related and SPHC-related claims to the trust.

In July 2014, RPM entered into an agreement in principle with the official representatives of current and future claimants that would resolve all present and future asbestos personal injury claims related to Bondex and other related entities. The agreement contemplates the filing of a plan or plans of reorganization with the U.S. Bankruptcy Court in Delaware. A plan was filed on Sept. 26, 2014. The plan is subject to approval of the claimants, as well as the bankruptcy court.

Under the terms of the agreement in principle, a trust (or trusts) will be established under Section 524(g) of the U.S. Bankruptcy Code for the benefit of current and future asbestos personal injury claimants. Upon the effective date of the plan, the trust will be funded with $450 million of cash and one or more promissory notes (bearing no interest) and maturing on or before the fourth anniversary of the effective date. The plan shall provide for the following contributions to the trust:

--$450 million upon the effective date;

--On or before the second anniversary of the effective date of the plan, an additional $102.5 million in cash, RPM stock or a combination of both, at the discretion of RPM, will be deposited to the trust;

--On or before the third anniversary of the effective date, an additional $120 million in cash, RPM stock, or a combination of both, and;

--On or before the fourth anniversary of the effective date, a final payment of $125 million in cash, RPM stock, or a combination of both.

Although the initial payment is expected to increase the company's debt levels, Fitch views the agreement positively as this could possibly resolve the uncertainty regarding potential liabilities associated with the asbestos litigation.

Upon confirmation of the plan, SPHC will be re-consolidated to the company's financial results. During FY14, SPHC had sales of about $385 million compared with $300 million during FY10, when SPHC was de-consolidated from RPM.

STABLE CREDIT METRICS

The company's credit metrics have been relatively stable over the past decade and remain appropriate for the rating level. Leverage as measured by debt to EBITDA was 2.5x for the latest 12 month (LTM) period ending Aug. 31, 2014 compared with 2.3x at the end of FY14 and 2.8x at the conclusion of FY13. Fitch expects leverage will settle around 2.5x at the end of FY15. This assumes that SPHC's asbestos plan is confirmed and the company makes the initial payment of $450 million to the trust during FY15. Total adjusted debt to EBITDAR was 2.9x for the Aug. 31, 2014 LTM period, compared with 2.7x at the end of FY14 and 3.2x at the conclusion of FY13. Fitch projects adjusted debt to EBITDAR will be approximately 3x at the end of FY15.

EBITDA to interest expense was 7.5x for the Aug. 31, 2014 LTM period compared with 7.4x at year-end FY14 and 6.2x at the conclusion of FY13. Funds from operations (FFO) interest coverage was 6.2x for the Aug. 31, 2014 LTM period vs. 5.1x at the end of FY14 and 5.0x at year-end FY13. Fitch expects EBITDA to interest expense will be roughly 7.5x while FFO interest coverage is forecast to be around 7.0x at the conclusion of FY15.

ADEQUATE LIQUIDITY POSITION

RPM has adequate liquidity and is able to meet its financial obligations. As of Aug. 31, 2014, the company had cash of $225 million and $667 million available under its $600 million revolving credit agreement (maturing in June 2017) and $200 million Accounts Receivable Securitization program (maturing in May 2017). Approximately $198 million of the company's cash and equivalents were held at various foreign subsidiaries.

Management expects to use availability under its credit facilities to fund the initial $450 million payment under the asbestos plan agreement (if the SPHC plan of reorganization is confirmed), and perhaps subsequently terming out some or all of these borrowings through a bond offering. Fitch believes that the company will continue to have access to its credit facilities as RPM has sufficient cushion under its financial covenants. As of Aug. 31, 2014, RPM's leverage was 50.8% vs. a maximum requirement of 60% and its interest coverage was 7.96x vs. a minimum requirement of 3.5x.

CONSISTENT FREE CASH FLOW GENERATION

RPM generated $59.4 million of FCF for the LTM period ending Aug. 31, 2014 compared with $58.7 million during FY14, $159.5 million during FY13, $111.1 million during FY12 and $89.8 million during FY11. The FCF during FY14 includes a one-time GSA-settlement payment of $61.9 million. For the LTM period ending Aug. 31, 2014, FCF was reduced by higher working capital needs. Management indicated that the company built up inventory for higher sales that were not realized during the first quarter of 2015 (1Q'15). The company was expecting a more robust sales growth during the 1Q'15. Fitch expects RPM will generate FCF of 3.5%-4.5% of revenues during the next few years.

CYCLICALITY OF END MARKETS

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 towards the repair and maintenance market, which is somewhat less volatile than the new construction market. Fitch currently expects mid-single digit growth in home improvement and commercial construction spending this year and in 2015. Total housing starts are projected to increase 7.8% in 2014 and 13.9% in 2015.

GROWTH THROUGH ACQUISITION STRATEGY

RPM uses acquisitions to augment its organic growth. Since June 2010, RPM has spent about $640 million on acquisitions, including four acquisitions totaling $39.4 million in FY14 and six acquisitions totaling $397.4 million during FY13. The company typically targets small, bolt-on acquisitions that are usually adjacent products and/or geographic extensions. About half of the company's growth over the past 30 years has been driven by acquisitions and Fitch expects RPM will continue to pursue acquisitions as part of its growth strategy.

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.

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

--A permanent resolution of the current asbestos liabilities issues.

--Meaningful debt reduction and/or EBITDA growth, with total debt to EBITDA below 2.0x and interest coverage above 8.0x on a continuing basis.

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

--Failure to resolve the current asbestos liabilities issues which results in a meaningful increase of asbestos-related cash outflows.

--A sustained erosion of profits and cash flows either due to weak residential and commercial construction activity or as the result of long-term higher raw material costs, leading to EBITDA margins below 12%, debt to EBITDA consistently above 3.0x and interest coverage below 5.0x.

--Leveraged acquisitions which result in debt to EBITDA sustaining over 3.0x.

--Dividends that claim most internally generated cash flow.

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

--IDR at 'BBB-';

--Senior unsecured debt at 'BBB-';

--Unsecured revolving credit facility at 'BBB-'.

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=901035

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