Fitch Downgrades Masco's IDR to 'BBB-'; Outlook Remains Negative

November 10, 2008 1:48 PM EST

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has downgraded Masco Corporation's (NYSE: MAS) ratings as follows:

    --Issuer Default Rating (IDR) to 'BBB-' from 'BBB';

    --Senior unsecured to 'BBB-' from 'BBB';

    --Unsecured bank credit facility to 'BBB-' from 'BBB'.

The downgrade reflects the greater than expected decline in operating results during the third quarter, weaker credit metrics, and the company's lower guidance for the remainder of 2008. Masco's operating margins and credit metrics continue to be negatively impacted by the difficult U.S. housing environment and the decline in home improvement spending. During the third quarter of 2008, management also indicated that it saw a significant slowdown in its European markets. Given the disruptions in the credit markets and weakening economies in the U.S. and in Europe, Fitch expects this trend to remain in place at least through the first half of 2009, if not longer.

The Negative Outlook for Masco reflects a more challenging outlook for housing and the home improvement sectors during the balance of 2008 and into 2009. Given Fitch's macroeconomic forecast and expected continued decline in housing metrics and lower home improvement spending next year, financial results and credit metrics are likely to be below that of 2008.

Net sales for the third quarter (ended Sept. 30, 2008) declined 16% year-over-year due to lower sales volume to the new home construction market and the continued decline in consumer spending for home improvement products. Gross margins for the quarter were down 270 basis points (bps) to 25.6% from 28.3% during the third quarter of 2007. Selling, general and administrative expenses declined from $479 million during the third quarter of 2007 to $452 million during the third quarter of 2008, but increased as a percentage of sales by 200 bps to 17.9%. The company currently projects sales for all of 2008 to decline in the mid-teens compared to 2007. The company's previous guidance estimated that its full year 2008 percentage sales decline would be low-double digits to mid-teens.

Masco continues to generate significant free cash flow, although lower compared to previous years. The company generated $420 million of free cash flow during the latest 12 months (LTM) period ending Sept. 30, 2008, compared with $675 million for fiscal year 2007 and $471 million during fiscal year 2006.

The company's credit metrics have also deteriorated compared to the end of 2007. Masco's leverage as measured by debt-to-EBITDA increased from 2.85 times (x) at Dec. 31, 2007 to 4.10x for the LTM period ending Sept. 30, 2008. Interest coverage declined from 5.60x during fiscal year 2007 to 4.30x for the LTM period ending Sept. 30, 2008.

The greater than expected decline in the company's operating results and weaker credit metrics are somewhat offset by the discipline management has shown this year. The company has been more restrained in its share repurchases during the last two quarters, which has allowed the company to build its cash position from $635 million at March 31, 2008 to $1.03 billion at the conclusion of the September 2008 quarter. So far in 2008, the company repurchased approximately 9 million shares of its common stock for $160 million, compared with $804 million (29 million shares) of share buybacks during the first nine months of 2007. Currently, Masco has 32 million shares remaining under its share repurchase authorization.

Future ratings and Outlooks will be influenced by broad housing and home improvement market trends, as well as company specific activity, particularly free cash flow trends and uses.

Founded in 1929, Masco Corporation manufactures, sells and installs home improvement and building products, with emphasis on brand name products and services holding leadership positions in their markets. The company is among the largest manufacturers in North America of brand name consumer products designed for home improvement and new construction markets.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.

Source: Fitch Ratings

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