Fitch Rates RPM's Proposed $250MM Sr. Unsecured Notes Offering 'BBB-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a 'BBB-' rating to RPM International Inc.'s RPM proposed offering of $250 million senior unsecured notes due 2045. This issue will be ranked on a pari passu basis with all other senior unsecured debt. Proceeds from the notes offering will be used to repay a portion of the outstanding borrowings under the company's revolving credit facility. The Rating Outlook is Stable. A complete list of ratings 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 and growth through acquisition strategy.

The Stable Outlook reflects Fitch's expectation that the company's U.S. construction end markets will continue to improve this year, 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 41% of RPM's FY14 net sales were generated from international markets.

RESOLUTION OF ASBESTOS LITIGATION

On Dec. 10, 2014, a bankruptcy plan was confirmed for RPM's subsidiary, Bondex International Inc. (Bondex), and its parent, Specialty Products Holding Corp. (SPHC), effective Dec. 23, 2014 (the effective date), allowing the subsidiary to emerge from bankruptcy. Bondex and SPHC had previously (May, 2010) filed voluntary petitions in the U.S. Bankruptcy Court in Delaware to reorganize under Chapter 11 of the Bankruptcy Court in an effort to permanently and comprehensively resolve all pending and future asbestos-related liability claims associated with Bondex and SPHC. The Chapter 11 filings targeted 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. As part of the bankruptcy filing, SPHC and its subsidiaries were deconsolidated from RPM and their operations were eliminated from the company's financial results effective May 31, 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 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. The plan provides for the following additional contributions to the trust:

--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 (for this payment and all subsequent payments), 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, will be deposited to the trust, 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, will be deposited to the trust.

The initial $450 million payment to the trust was funded by borrowings under the company's $800 million revolving credit facility. Proceeds from the proposed notes offering will be used to repay a portion of the credit facility's outstanding balance.

Following the confirmation of the bankruptcy plan, the financial results of SPHC has been reconsolidated with RPM's results as of Jan. 1, 2015. SPHC has annual revenues of about $400 million.

Although the confirmation of the bankruptcy plan requires a meaningful payment, Fitch views the resolution positively as this resolves the uncertainty regarding potential liabilities associated with the asbestos litigation.

STABLE CREDIT METRICS

The company's credit metrics have been relatively stable over the past decade and remain appropriate for the rating level. Leverage for the latest 12 month (LTM) period ending Feb. 28, 2015 was somewhat elevated compared with previous years due to the $450 million initial payment to the asbestos trust.

Leverage as measured by debt to EBITDA was 3.1x for the LTM period ending Feb. 28, 2015 compared with 2.3x at the end of FY14 (ending May 31, 2014) and 2.8x at the conclusion of FY13. Fitch expects leverage will settle around 2.5x at the end of FY15 and will be below 2.5x during FY16 as the full year results of the SPHC operations are reflected in the company's financial results. Total adjusted debt to EBITDAR was 3.4x for the Feb. 28, 2015 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 and will be below this level during FY16.

EBITDA to interest expense was 7.6x for the Feb. 28, 2015 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 5.6x for the Feb. 28, 2015 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.

CONSISTENT FREE CASH FLOW GENERATION

RPM generated $56.2 million of FCF for the LTM period ending Feb. 28, 2015 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 Feb. 28, 2015, FCF was reduced by higher working capital to support improved sales, and cash payments for professional fees related to the final settlement of the asbestos litigation. Fitch expects RPM will generate FCF of 2.5% - 3.5% of revenues during FY15.

GROWTH THROUGH ACQUISITION STRATEGY

RPM uses acquisitions to augment its organic growth. Since June 2010, RPM has spent about $640 million on acquisitions (excluding SPHC, which was accounted for as an acquisition in the reconsolidation), including four acquisitions totaling $39.2 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.

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. Total housing starts are projected to increase 14% in 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--U.S. construction spending increases 7% during 2015;

--RPM's revenues grow mid-single-digits and the company reports relatively stable EBITDA margins in 2015;

--Debt/EBITDA of about 2.5x and interest coverage at or above 7.0x during 2015;

--FCF margins of between 2.5% - 3.5%;

--No meaningful share repurchases in the near to intermediate term.

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:

--Meaningful debt reduction and/or EBITDA growth, with total debt to EBITDA consistently 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:

--A sustained erosion of profits and cash flows either due to weak residential and commercial construction activity or as the result of persistently 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.

LIQUIDITY

RPM has adequate liquidity and is able to meet its financial obligations. As of Feb. 28, 2015, the company had cash of $220.4 million and $427.9 million available under its $800 million revolving credit agreement. Approximately $183.7 million of the company's cash and equivalents were held at various foreign subsidiaries. During 3Q'15, RPM concluded that it is possible that $347.5 million of unremitted foreign earnings could be repatriated to the U.S. in the foreseeable future. As such, the company recorded a non-cash provision for deferred income taxes of $106.2 million.

In December 2014, the company entered into a new $800 million revolving credit facility which expires in December 2019. The new revolver replaced the company's $600 million facility that was scheduled to mature in June 2017.

RPM also has a $200 million accounts receivable securitization facility that matures in May 2017. As of Feb. 28, 2015, the outstanding balance under the facility was $150 million, which was the maximum availability on that date.

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 Feb. 28, 2015, RPM's leverage was 58.9% vs. a maximum requirement of 65% and its interest coverage was 9.4x vs. a minimum requirement of 3.5x. Fitch expects availability under the revolver will increase as the company pays down outstandings under the facility with the proposed notes issuance.

FULL LIST OF RATINGS

RPM International, Inc.

--IDR 'BBB-';

--Senior unsecured debt 'BBB-';

--Unsecured revolving credit facility 'BBB-'.

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

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

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=985321

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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