S&P Lifts PPG Industries (PPG) to 'A-', Outlook Stable; Cites Changes in Financial Risk Profile
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Standard & Poor's Ratings Services said it raised its ratings, including its corporate credit rating, on U.S.-based coatings player PPG Industries Inc. (NYSE: PPG) to 'A-' from 'BBB+'. The outlook is stable.
The upgrade reflects the change in our assessment of PPG Industries Inc.'s (PPG) financial risk profile to "modest" from "intermediate." This is supported by our expectations that PPG's steadily improving operating performance and its prudent approach toward growth spending and shareholder rewards will support a modest financial profile. The company's five-year weighted average adjusted debt to EBITDA is below 2x, and most of its projected supplemental ratios indicate a modest financial risk profile.
"The stable outlook reflects our view that PPG's earnings will continue to benefit from improving volumes and relatively stable profitability (albeit at a slightly lower level following the pending divestiture of the high margin Transitions Optical business) over the next few years," said Standard & Poor's credit analyst Liley Mehta.
Management's financial policies remain a key underpinning for the current ratings, and acquisitions remain an integral part of PPG's growth strategy in the consolidating coatings industry. We assume that management will continue to balance acquisitions, shareholder returns, and investments to achieve cash flow protection ratios we consider commensurate with the ratings. This specifically includes adjusted debt to EBITDA ranging between 1.5x and 2x.
We could also lower the ratings if higher-than-expected raw material cost inflation or sales volume declines result in deterioration in credit measures such that total adjusted debt to EBITDA was consistently in the intermediate range of 2x to 3x with no prospects for recovery. This could occur if revenues declined by 5% or more and gross margins deteriorated by 200 basis points. We could also consider a negative rating action if, debt-financed acquisitions, or a larger-than-expected share repurchases led to weaker cash flow protection
measures that were reflective of an intermediate financial profile.
We consider the potential for a positive rating action possible if credit measures improved from our base case expectation such that adjusted debt to EBITDA of about 1.5x was sustainable. This could occur if favorable macroeconomic conditions supported revenue growth of 8% or more and gross margins improved by 200 basis points.
The upgrade reflects the change in our assessment of PPG Industries Inc.'s (PPG) financial risk profile to "modest" from "intermediate." This is supported by our expectations that PPG's steadily improving operating performance and its prudent approach toward growth spending and shareholder rewards will support a modest financial profile. The company's five-year weighted average adjusted debt to EBITDA is below 2x, and most of its projected supplemental ratios indicate a modest financial risk profile.
"The stable outlook reflects our view that PPG's earnings will continue to benefit from improving volumes and relatively stable profitability (albeit at a slightly lower level following the pending divestiture of the high margin Transitions Optical business) over the next few years," said Standard & Poor's credit analyst Liley Mehta.
Management's financial policies remain a key underpinning for the current ratings, and acquisitions remain an integral part of PPG's growth strategy in the consolidating coatings industry. We assume that management will continue to balance acquisitions, shareholder returns, and investments to achieve cash flow protection ratios we consider commensurate with the ratings. This specifically includes adjusted debt to EBITDA ranging between 1.5x and 2x.
We could also lower the ratings if higher-than-expected raw material cost inflation or sales volume declines result in deterioration in credit measures such that total adjusted debt to EBITDA was consistently in the intermediate range of 2x to 3x with no prospects for recovery. This could occur if revenues declined by 5% or more and gross margins deteriorated by 200 basis points. We could also consider a negative rating action if, debt-financed acquisitions, or a larger-than-expected share repurchases led to weaker cash flow protection
measures that were reflective of an intermediate financial profile.
We consider the potential for a positive rating action possible if credit measures improved from our base case expectation such that adjusted debt to EBITDA of about 1.5x was sustainable. This could occur if favorable macroeconomic conditions supported revenue growth of 8% or more and gross margins improved by 200 basis points.
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