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

CHICAGO--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of PPG Industries, Inc. PPG, including the company's Issuer Default Rating (IDR), at 'A-'. 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 most of its coatings product markets, consistent strong earnings, and excellent cash flow. Risk factors include the cyclicality of most of PPG's end-markets, often volatile raw materials and energy costs, aggressive growth strategy and the company's exposure to asbestos litigation.

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 2015 and 2016.

FOCUS ON COATINGS BUSINESSES AND LEADERSHIP POSITION

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. in April 2013, divestiture of its 51% interest in the Transitions Optical joint venture to Essilor International in April 2014, and the acquisition of Consorcio Comex S.A. de C.V. (Comex) in November 2014 further reflect PPG's transformation into primarily a coatings company.

PPG is one of the largest coatings companies in the world. According to the company, it has global leadership positions (#1 or #2) in all of the coatings end-use markets and is the only large coatings company that participates in all end-use markets.

SOLID LIQUIDITY AND FREE CASH FLOW (FCF) GENERATION

As of June 30, 2015, the company had $707 million of unrestricted cash, $475 million of short-term investments and roughly $1 billion of availability under its $1.5 billion CP program that is backed by the company's $1.5 billion revolving credit facility.

The company's debt maturities are well-laddered, with $253 million of debt maturing in 2016, $608 million in 2017, and $127 million in 2018. PPG has sufficient liquidity to pay these upcoming debt maturities with cash on hand and/or borrowings under the revolver. Additionally, the company has demonstrated its ability to access the capital markets and Fitch expects PPG will refinance some of these notes well in advance of their maturities.

PPG generates strong FCF. For the latest 12 months (LTM) ending June 30, 2015, the company generated $429 million of FCF (2.8% of revenues), which includes approximately $270 million of voluntary pension contributions. By comparison, PPG generated $580 million (3.8%) of FCF during 2014, $841 million (5.6%) during 2013, $1.02 billion (6.7%) during 2012 and $691 million (4.6%) during 2011. Fitch expects the FCF margin will be roughly 3.0%-4.0% this year (including about $270 million of voluntary pension contributions) and will approximate 5.5% - 6.5% during 2016 and 2017.

STRONG CREDIT METRICS

PPG's credit metrics remain appropriate for the rating level. Leverage as measured by debt-to-EBITDA for the June 30, 2015 LTM period was 1.8x compared with 1.7x at the end of 2014, 1.4x at the conclusion of 2013, and 1.7x at year-end 2012. Fitch expects leverage will settle at around 1.6x at the end of 2015 and should remain at or around this level during the next few years. EBITDA-to-interest was 14.4x for the June 30, 2015 LTM period compared with 11.8x during 2014, 11.5x during 2013, and 11.1x during 2012. Fitch expects interest coverage will settle above 18x during the next few years as the company completed several refinancing activities last year and earlier this year that reduce interest expense between $50 million and $60 million on an annual basis.

DISCIPLINED CAPITAL ALLOCATION STRATEGY

PPG 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 its stock, particularly during periods when the company did not find suitable acquisition opportunities. However, PPG has shown discipline in the past, pulling back on share repurchases following a sizeable acquisition in an effort to reduce debt.

In April 2015, PPG announced a 7.5% increase in quarterly dividend payments to $0.72 per share from $0.67 per share. This follows a 10% increase in quarterly dividends during 2014. In April 2014, the company's board also authorized a new $2 billion share repurchase program. In January 2015, PPG announced a cash deployment target for acquisitions and share buybacks of between $1.5 billion and $2.5 billion for 2015 and 2016 combined. Through the first six months of 2015, the company has spent about $350 million on share repurchases and has committed about $400 million for completed/announced acquisitions. As of June 30, 2015, the company had roughly $1.35 billion remaining under its existing share repurchase authorization.

Fitch expects PPG will allocate between $1.5 billion and $2.5 billion for acquisitions and share repurchases during 2015 and 2016. If the company settles its asbestos litigation in 2016, Fitch would expect the company's capital deployment could perhaps be closer to the lower end of its target range. Fitch believes that PPG can generate sufficient FCF to fund its cash deployment target without straining its liquidity position or increasing debt levels.

AGGRESSIVE GROWTH STRATEGY

PPG has spent over $7 billion for acquisitions since 2006, including the $3.2 billion acquisition of SigmaKalon in 2008, the $1.05 billion purchase of the NA architectural coatings business of Akzo Nobel N.V. in 2013, and the $2.3 billion acquisition of Comex in 2014. So far this year, PPG has committed about $400 million for completed/announced acquisitions. Fitch expects that acquisitions will be the priority for excess cash flow and the agency expects the company will continue to pursue acquisition opportunities, with primary focus on coatings and adjacent businesses (i.e. sealants and adhesives) as well as in emerging markets.

ASBESTOS LITIGATION

PPG has been a defendant in lawsuits involving asbestos claims for over 30 years, mostly related to its 50% ownership of Pittsburgh Corning Corporation (PC), a 50-50 venture owned by PPG and Corning Incorporated. Under the terms of the current settlement arrangement, PPG would make aggregate cash payments of $825 million (payable according to a fixed payment schedule over a period ending 2023), contribute 1.4 million shares of its stock (before giving effect to the 2-for-1 stock split on June 12, 2015), and convey the stock it owns in PC to a trust. PPG's participating historical insurance carriers would make cash payments to the trust of approximately $1.7 billion.

If the asbestos settlement becomes effective, Fitch believes that the company has sufficient cash and CP/bank revolver availability to meet the required cash payments.

In addition, the company also has $162 million of reserves for asbestos-related claims that will not be channeled to the trust. PPG currently does not have sufficient current claim information or settlement history on which to base a better estimate of this liability. The current settlement agreement also does not cover 'premises' claims, which comprise less than 2% of the total asbestos related claims against PPG.

CYCLICALITY OF MANY OF PPG'S END-MARKETS

PPG estimates that about 45% of the company's sales is directed to the construction market (new and maintenance) while 33% is from the automotive sector (OEM and aftermarket). Fitch currently expects U.S. construction spending will increase 7.3% while construction activity in the EMEA region is expected to grow only slightly in 2015. Fitch also forecasts global auto demand will rise in the low single digits this year.

KEY ASSUMPTIONS

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

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

--Global demand for new vehicles rises in the low single digits in 2015;

--EBITDA margins improve 50 bps-100 bps in 2015 compared with 2014 margins;

--Debt/EBITDA approximates 1.6x and interest coverage sustains above 15x at year-end 2015;

--The company reports a FCF margin of 3.0%-4.0% during 2015 and 5.5%-6.5% during 2016-2017;

--PPG deploys between $1.5 billion-$2.5 billion for acquisitions and share repurchases during 2015 and 2016.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad end-market trends as well as company-specific activity, including FCF trends and uses, and liquidity.

While Fitch does not currently anticipate a positive rating action in the next 12 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 and interest coverage steadily above 15x, and if PPG's asbestos litigation is settled or if the company 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: revenue decline of 10%; EBITDA margins falling to between 11%-12%, and leverage levels consistently above 2x.

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.

FULL LIST OF RATING ACTIONS

Fitch affirms the following ratings for PPG Industries, Inc.:

--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'.

The Rating Outlook is Stable

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=989560

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=989560

Endorsement Policy

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

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