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

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has affirmed the ratings of PPG Industries, Inc. PPG, including the company's Long-Term 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

PPG's ratings reflect 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. Risks include the cyclicality of most of PPG's end-markets, often volatile raw materials and energy costs, and somewhat aggressive growth strategy.

The Stable Outlook reflects PPG's strong liquidity position, management's consistent and disciplined capital allocation strategy, and Fitch's expectation of a modest improvement in most of PPG's end markets in 2016 and 2017.

PPG's risk profile has improved over the past few quarters as the company resolved its asbestos litigation and also transferred pension benefits and annuity administration for $1.6 billion of U.S. pension liabilities to two insurance companies. PPG has also taken steps to further focus on its coatings businesses by agreeing to sell its flat glass and European fibre glass operations.

RESOLUTION OF 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. On April 27, 2016, the Pittsburgh Corning Plan of Reorganization, including its asbestos channelling injunction, became effective. In June 2016, PPG fully funded its portion of the Pittsburgh Corning Asbestos Trust that was established by the U.S. Bankruptcy Court. PPG fulfilled its initial funding requirements, which included cash funding of $506 million (pre-tax) and the transfer of about 2.78 million shares of PPG common stock (which PPG had previously hedged at $22 per share and settled for an incremental cash payment of $49 million). In addition to the initial funding obligation, PPG also exercised its option to prepay all future cash obligations, totalling about $258 million (pre-tax), including a 5.5% pre-payment discount rate.

This completes PPG's funding obligations related to the Pittsburgh Corning Asbestos Trust and PPG has no ongoing responsibility for the Trust's operation and management. The settlement does not cover "premises" claims, which the company retained $162 million as a reserve for asbestos-related claims that were not channelled to the Trust.

DISPOSITION OF NON-CORE OPERATIONS

On July 21, 2016, PPG announced that it has signed a definitive agreement to sell the assets of its flat glass manufacturing and glass coatings operations to Vitro S.A.B. de C.V., a leading producer of flat glass and specialty products, for approximately $750 million. The transaction is expected to close by the end of 2016. In June 2016, the company signed an agreement to sell its European fibre glass operations to Nippon Electric Glass Co. Ltd. In April 2016, PPG sold its minority ownership interest in Pittsburgh Glass Works, LLC to LKQ Corporation for $41 million. The company will continue to operate its U.S. fibre glass business.

These latest actions are consistent with management's strategy to transform the company into primarily a coatings company. Following the completion of these transactions, 98% of PPG's business portfolio will be focused on paints, coatings and specialty materials.

PENSION RISK TRANSFER

On Aug. 3, 2016, PPG completed the transfer of certain U.S. pension obligations to Massachusetts Mutual Life Insurance Company and Metropolitan Life Insurance Company. The plans will purchase group annuity contracts that will irrevocably transfer to the two insurance companies the future pension benefit obligations covering approximately 13,000 U.S. salaried and non-union retirees who began receiving their monthly retirement benefit payments on or before April 1, 2016. The transaction transfers U.S. pension benefits and annuity administration for $1.6 billion of projected benefit obligations. The purchase of the annuity contracts will be funded directly by the assets of the plans being transferred.

The company expects to make cash contributions of approximately $175 million to these U.S. pension plans in 2016 and 2017. The pension transfer allows the company to reduce volatility of future earnings and mitigate financial risks associated with these pension plans.

SOMEWHAT 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 North American architectural coatings business of Akzo Nobel N.V. in 2013 and the $2.3 billion (including assumption of debt) acquisition of Comex in 2014. In 2015, the company spent $320 million, net of cash acquired, to make several strategic bolt-on acquisitions with a total purchase price of $440 million. In July 2016, the company completed the acquisition of MetoKote Corporation, a U.S.-based coatings services business with global sales of approximately $200 million.

Fitch expects that acquisitions will be the priority for excess cash flow and the agency expects the company will continue to pursue bolt-on acquisition opportunities (acquisition targets with revenues of $50 to $500 million), with primary focus on coatings and adjacent businesses (i.e. sealants and adhesives) as well as in emerging markets.

LEADERSHIP POSITION AND FOCUS ON COATINGS BUSINESSES

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.

Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The company has taken steps to focus on its coatings businesses, including the acquisition of SigmaKalon in 2008, the divestiture of the commodity chemicals business in early 2013, the acquisition of the North American architectural coatings business of Akzo Nobel N.V. in April 2013, the 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. During the past few months, the company has also agreed to divest its flat glass and European fibre glass operations. Following the completion of these transactions, 98% of PPG's business portfolio will be focused on paints, coatings and specialty materials.

CREDIT METRICS

PPG's credit metrics remain appropriate for the rating level. Leverage for the latest-12-months (LTM) ended June 30, 2016 was 1.9x compared with 1.6x at the end of 2015 and 1.7x at the conclusion of 2014. Fitch expects leverage will settle around 1.6x at the end of 2016 and should remain around this level during the next few years. EBITDA to interest was 23.2x for the June 30, 2016 LTM period compared with 22.9x during 2015 and 11.0x during 2014. PPG completed several refinancing activities in 2014 and 2015 that reduced interest expense by roughly $60 million on an annual basis.

SOLID LIQUIDITY POSITION

As of June 30, 2016, the company had $1.6 billion of unrestricted cash, $64 million of short-term investments and roughly $1 billion of availability under its $1.8 billion CP program that is backed by the company's $1.8 billion revolving credit facility. Part of the cash at the end of the quarter was used to fund the acquisition of Metokote, which was completed on July 1, 2016. The company has about $1 billion of debt maturing in 2017. PPG has demonstrated its ability to access the capital markets and Fitch expects the company will refinance these maturities.

STRONG FCF GENERATION

PPG generates strong FCF. For the LTM period ending June 30, 2016, the company generated $762 million of FCF (5% of sales), compared with $977 million during 2015 (6.4%), $580 million during 2014 (3.8%), $841 million (5.6%) during 2013, $1.02 billion (6.7%) during 2012 and $691 million (4.6%) during 2011. The LTM FCF includes the $813 million payment for the company's asbestos obligation. Fitch expects FCF margin will be roughly 2% this year (including the asbestos payment and voluntary pension contributions) and will approximate 6% - 7% during 2017 and 2018.

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 pulling back on share repurchases following a sizeable acquisition in an effort to reduce debt.

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. PPG adjusted this range to between $2 billion and $2.5 billion in September 2015. So far, the company has deployed about $1.6 billion, including the July acquisition of MetoKote. Management expects to accelerate the pace of the cash deployment in the second half of 2016, targeting the upper end of the range. Management reiterated that the strong preference will be acquisitions over share buybacks. Going forward, Fitch expects the company will deploy excess FCF for acquisitions and share repurchases.

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% -8% during 2016 and 2017. 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:

--Low single-digit revenue growth (excluding the glass business) during 2016;

--EBITDA margins expand 25 - 75 bps;

--Debt to EBITDA settles around 1.6x at year-end 2016;

--Interest coverage is above 20x;

--FCF Margin of 2%, including the asbestos payments and voluntary pension contributions;

--Approximately $1.3 billion of cash deployed for acquisitions and share repurchases during 2016;

--PPG completes the divestiture of the flat glass and European fibre glass businesses and uses cash proceeds to pay down debt.

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.

Positive rating actions may be considered if the company's credit metrics improve meaningfully from current levels, including debt/EBITDA consistently in the 1x - 1.5x range, FFO adjusted leverage sustained below 2.5x and FFO fixed charge coverage approaches 7x.

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: EBITDA margins falling below 15%, debt/EBITDA consistently above 2x, FFO adjusted leverage sustained above 3.5x and FFO fixed charge coverage falls below 5.0x.

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 affirmed 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

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected EBITDA is adjusted to add back non-cash stock-based compensation and restructuring charges.

Applicable Criteria

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

https://www.fitchratings.com/site/re/869362

Short-Term Ratings Criteria for Non-Financial Corporates (pub. 13 Aug 2015)

https://www.fitchratings.com/site/re/869259

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011003

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011003

Endorsement Policy

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

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