S&P Upgrades L-T Corp. Rating on RPM International (RPM) to 'BBB' on Improving Financial Risk Profile

Standard & Poor's Ratings Services raised its long-term corporate credit rating on RPM International Inc. to 'BBB' from 'BBB-'. The outlook is stable.

At the same time, we raised our issue-level ratings on the company's existing unsecured debt to 'BBB' from 'BBB-', and assigned a 'BBB' issue-level rating to the company's proposed $250 million senior unsecured notes. We expect that the company will use the proceeds from the notes issuance to reduce outstanding borrowings under the revolving credit facility.

"The upgrade follows our reassessment of the company's financial risk profile as 'intermediate' from 'significant,' as defined in our criteria," said Standard & Poor's credit analyst Daniel Krauss. "We characterize RPM's business risk profile as 'strong,' reflecting its leading market positions in specialty protective coatings, good business diversity, and stable earnings, and consider liquidity 'strong,' as defined in our criteria."

In December 2014, the U.S. Bankruptcy Court confirmed the plan of reorganization for RPM's Specialty Products Holding Corp. (SPHC) subsidiary and related entities. At closing of the reorganization plan, a trust was established under section 524(g) of the U.S. Bankruptcy Code, which will assume all liability and responsibility for the current and future asbestos claims. Financial results of SPHC's operating subsidiaries will be reconsolidated with RPM's results. SPHC and its subsidiaries have annualized sales of about $400 million, with EBITDA margins roughly in line with the rest of RPM's business. Now that there is more certainty relating to the timing and amount of the trust funding, and following our financial policy discussions with the company, we would expect the company to prudently fund acquisitions, while maintaining appropriate credit measures for the current rating. The remaining payments appear manageable: $103 million by December 2016, $120 million by December 2017, and $125 million by December 2018.

The outlook on RPM International Inc. is stable reflecting that the majority of the company's revenues come from maintenance, repair, and renovation projects, which imparts stability in operating margins and earnings. In addition, we expect RPM's earnings to benefit to some extent from the improving housing and construction end markets in the U.S. We expect that now that the asbestos trust has been set up, the company might be more aggressive regarding acquisitions and shareholder rewards than they have been in recent years. At the current rating, we would expect the company to maintain a weighted average FFO to debt ratio approaching 30% and debt to EBITDA below 3x.

We could lower the ratings if RPM's revenues decline by well over 15% (after assuming ongoing acquisitions in line with historical levels) and if its margins deteriorate by 200 basis points or more from current levels because of an increase in raw material costs. The ratings could also come under pressure if the company makes larger-than-expected debt-funded acquisitions or shareholder rewards. If these conditions were to occur, RPM's FFO to total debt ratio could decline to below 25% and debt to EBITDA could rise above 3x for a sustained period of time, which could prompt us to lower the ratings.

We could raise the ratings if improving cash flows and moderate debt reduction led to a strengthening in the company's FFO to debt ratio such that it improved to above 40%. To consider an upgrade, we would have to gain comfort that the company will be able to maintain financial policies, which support the improved financial measures.

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