Moody's Downgrades 3M Co. (MMM) to 'Aa3'; Outlook Negative

Moody's Investors Service downgraded 3M Company's (NYSE: MMM) senior unsecured rating to Aa3 from Aa2 and affirmed the company's short-term rating of Prime-1. The rating outlook remains negative.

RATINGS RATIONALE

The action recognizes that, despite expectations for continued strong operating performance, the company intends to materially increase the amount of debt in its capital structure, lowering its cost of capital but progressively elevating financial risk for creditors. In 2015 it anticipates adding between $3-$5 billion of debt, representing a 40% or more increase over year-end 2014 levels of roughly $6.8 billion. Over time, further increases in debt are expected but earnings growth will moderate the impact on leverage measures, such as debt/EBITDA. Although Moody's expects 3M will keep generating $2.5-$3.0 billion of annual free cash flow, deployments for acquisitions and share-repurchases based on its disclosures will exceed this level, leading to external financing requirements.

3M has substantial scale with approximately $33 billion of revenue expected for 2015 and broad diversification by market. 3M typically has leading market shares in its core segments, and has a record of superior margins compared to other manufacturing companies with a 22% operating margin expected for the coming year. Along with favorable growth prospects, ongoing management disciplines and predictable free cash flow, these contribute to relatively low volatility in its business model compared to other large manufacturing firms.

The negative outlook considers 3M's willingness to appreciably increase the level of debt in the near term. As this represents a departure from the company's historically highly predictable financial position, the rating outlook will be clarified to the extent by which Moody's anticipates the company will add indebtedness over time. Moody's analysis will be based on the anticipated mix of funding for share repurchases and corporate transactions which could require external financing and anticipated consistency in the application of financial policy over time. Moody's also anticipates that 3M will continue to have excellent liquidity, low-to-mid single digit revenue growth, sustained margins and cash flows.

As 3M is expected to steadily raise the proportion of debt in its capital structure, higher ratings are not anticipated. A stable outlook would require sustained margins and cash flows as well as establishing an upper bound of how high it is prepared to take leverage in the context of its investment profile and the use of proceeds for the added debt. The ratings could be downgraded should volatility in performance widen, margins or liquidity significantly decline or if leverage appreciably exceeds current expectations. Quantitatively this would involve debt/EBITDA approaching 2 times, EBITA % margin falling appreciably below 20%, or retained cash flow/debt declining below 20%.

Ratings lowered:

Senior unsecured to Aa3 from Aa2

Unsecured shelf and MTN filings to (P)Aa3 from (P)Aa2

Ratings affirmed:

Short-term, Prime-1

Outlook is unchanged at negative.

The principal methodology used in these ratings was Global Manufacturing Companies published in July 2014.

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