Fitch Rates Sherwin-Williams' Proposed $750MM Sr. Unsecured Notes Offering 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned an 'A-' rating to The Sherwin-Williams Company's (NYSE: SHW) proposed offering of $750 million aggregate amount of senior unsecured notes.

The notes offering will be comprised of 10-year and 30-year notes. These issues will be ranked on a pari passu basis with all other senior unsecured debt. Proceeds from the notes offering will be used for general corporate purposes, including to repay a portion SHW's outstanding short-term borrowings, consisting of commercial paper and borrowings under one of its revolving credit facilities.

The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings for SHW incorporate the company's leading market position in the architectural coatings industry, its unique distribution platform, the breadth and depth of its product offerings, solid free cash flow (FCF) generation, and strong management team. Risk factors include lead-based paint litigation cases pending against SHW, volatile raw materials costs, the cyclicality of the company's end markets, and SHW's relatively aggressive growth strategy.

The Stable Outlook reflects the expected continued improvement in the overall U.S. construction market during 2015. The Stable Outlook also reflects the company's solid liquidity position and strong operating performance expected during 2015.

STRONG CREDIT METRICS

SHW's credit metrics remain appropriate for the rating level. Debt to EBITDA for the latest-12-months (LTM) ending June 30, 2015 was 1.3x compared with 1.1x at the end of 2014, 1.2x at year-end 2013 and 1.4x at the conclusion of 2012. Adjusted debt to EBITDAR was 2.6x for the LTM period ending June 30, 2015 compared with 2.5x at the end of 2014, 2.5x at year-end 2013 and 2.7x at the conclusion of 2012. Fitch expects debt to EBITDA and adjusted debt to EBITDAR will be around 1.1x and 2.4x, respectively, at the end of 2015.

Interest coverage remains solid at 30.0x for the LTM period ending June 30, 2015 compared with 24.7x during 2014, 22.2x during 2013 and 29.4x in 2012. Fitch expects interest coverage will settle around 28.0x in 2015. FFO fixed charge coverage was 3.7x for the LTM period ending June 30, 2015 compared with 3.6x during 2014, 3.6x during 2013 and 3.7x during 2012. Fitch expects FFO fixed charge coverage will remain around 3.5x during the next few years.

SOLID LIQUIDITY AND CASH FLOW GENERATION

As of June 30, 2015, SHW had cash of $75 million and $324.8 million of unused capacity under its $1.05 billion CP program that is backed by a $1.05 billion revolving credit facility. In addition, Fitch estimates that the company has about $750 million of borrowing capacity under its various domestic and foreign revolving and letter of credit facilities.

On July 16, 2015, the company entered into a new $1.35 billion five-year revolving credit agreement that matures on July 16, 2020. This new facility replaces SHW's existing $1.05 billion revolver, its CAD75 million revolving facility, and its EUR95 million credit agreement.

SHW has no major debt maturities until 2017, when $700 million of senior notes matures. As of June 30, 2015, the company had $725.2 million of borrowings under the CP program and $434.1 million borrowed under its short-term revolving and letter of credit agreements. Fitch expects SHW will repay some of its short-term borrowings with the proposed notes offering and FCF.

Cash flow generation remains strong with FCF totaling $645.9 million (5.7% FCF margin) for the LTM period ending June 30, 2015 compared with $665.7 million (6%) of FCF during 2014, $712 million (7%) during 2013, $569.8 million (6%) during 2012. Fitch projects SHW will generate FCF margins of 5.5%-6.5% during the next few years.

LEADERSHIP POSITION WITH UNIQUE DISTRIBUTION PLATFORM

SHW is the largest coatings manufacturer in the U.S. and the third largest worldwide. SHW has a network of more than 4,000 company-operated paint stores and 576 company-operated branches as of Dec. 31, 2014. The company is unique in that most of its competitors distribute their products through 'Big Box' retailers, hardware stores and mass merchandisers. The networks of competitor paint companies that distribute through company-owned stores are not as extensive as that of SHW. Fitch views this as an advantage, as the company can directly control marketing, merchandising, service, and price decisions at its stores. Additionally, SHW also distributes through 'Big Box' Home Centers and mass merchandisers, primarily reaching the do-it-yourself (DIY) customer segment.

The company estimates that about 75% of its sales are through its controlled distribution platform, with the remaining 25% through independent retailers.

MANAGEMENT DISCIPLINE

SHW has a strong track record of adhering to a disciplined financial strategy, balancing capital deployed for growth opportunities and shareholder friendly activities. The company has a target leverage of about 1.0x as measured by debt to EBITDA, although SHW may be slightly above this level during certain periods when the company increases short-term borrowings to fund working capital. Additionally, the company's leverage may also go above this level if it makes a sizeable acquisition. However, as the company had demonstrated in the past, Fitch would expect SHW will return to its target leverage within a reasonable period of time if the company completes a large acquisition.

SHARE REPURCHASES

SHW repurchased $1.49 billion of its common stock in 2014 compared with $769.3 million in 2013, $557.8 million in 2012 and $367.4 million in 2011. During the 1H15, SHW bought back $679.4 million of stock. By comparison, the company spent $665.5 million on share repurchases during 1H14. At the end of the second quarter, SHW had 2.98 million shares remaining under its share repurchase authorization.

Fitch is comfortable with the company's share repurchase activity given its strong FCF, solid liquidity position and management's track record of adhering to a disciplined financial strategy. Fitch expects SHW will remain disciplined with its capital allocation, balancing acquisitions and share repurchases.

GROWTH STRATEGY

The company seeks to expand its distribution platform by opening new stores and pursuing acquisition opportunities. In a solidly expanding economy, management plans to expand the store base at an average of 3% per year (100+ stores annually). During 2014, the company opened 95 net new stores (109 new stores opened and 14 stores closed). SHW currently plans to open around 100 net new stores this year.

SHW has spent over $1.5 billion for acquisitions since 2004 (none in 2014 and so far in 2015). Fitch believes that acquisitions will remain a priority for excess cash flow and the agency expects SHW will continue to pursue acquisition opportunities, with primary focus on building its architectural coatings platform in the Western hemisphere as well as expanding its coatings business in emerging markets.

IMPROVEMENT IN SHW'S U.S. END-MARKETS

Fitch's ratings on SHW take into account the cyclicality of the company's end markets. Residential, commercial and industrial construction are each cyclical and can be influenced by economic trends. Fitch expects total U.S. construction spending will increase 7.1% during 2015 after growing 5.4% in 2014 and 5.8% in 2013.

Fitch projects total housing starts will expand 10.7% to 1.11 million as single-family starts advance 12.5% and multifamily volumes gain 7.3%. New home sales should grow 20%, while existing home sales rise 4.3%.

Fitch forecasts home improvement spending will increase 6% in 2015 following an estimated 4% growth in 2014. The continued improvement in the housing market, as well gains in home prices in 2013 and 2014, are likely to drive higher spending on home renovation projects in 2015.

Non-residential construction is also expected to grow modestly during 2015. Fitch expects private non-residential construction spending will improve 7.5% during 2015 while public construction spending is forecast to increase 3% this year.

LEAD-BASED PAINT LITIGATION RISKS

SHW and other companies are or were defendants in legal proceedings seeking recovery related to lead-based paint litigation cases. On Dec. 16, 2013, a California Superior Court judge ordered SHW and two other companies (ConAgra Grocery Products Co. and NL Industries) to pay $1.15 billion into a fund to be used to clean-up hazards from lead-based paint in homes in the state of California. The Santa Clara County, California proceeding was initiated in March 2000 by 10 counties and cities in the state of California and asserted a claim for public nuisance, alleging that the presence of lead products for use in paint and coatings in, on and around buildings in the plaintiff's jurisdictions constitutes a public nuisance. The court entered final judgment on Jan. 27, 2014, holding the defendants jointly and severally liable to pay $1.15 billion into a fund to abate the public nuisance.

On March 28, 2014, the company filed a notice of appeal to the Sixth District Court of Appeal for the State of California. The filing of the notice of appeal effects an automatic stay of the judgment without the requirement to post a bond. The parties are currently waiting for the Court of Appeals to set a date for oral arguments. Management expects that the Court of Appeals will issue its ruling within 90 days following oral arguments.

Aside from the potential liability associated with the abatement costs, there is also increased possibility that the California decision could have broader ramifications by encouraging similar legal actions from other state and/or municipalities. Following the February 2006 jury verdict against SHW and other defendants in the State of Rhode Island in a similar public nuisance case, the State of Ohio and several cities in Ohio individually initiated proceedings in state court in 2006 and 2007 against SHW and other companies asserting claims for public nuisance. Those actions in Ohio were subsequently voluntarily dismissed by the plaintiffs after the Rhode Island Supreme Court reversed the public nuisance judgment against the company and the other defendants in 2008.

KEY ASSUMPTIONS

Fitch's key assumptions within its rating case for the issuer include:

--U.S. construction spending increases 7% during 2015;

--SHW's revenues rise mid-single digits during 2015;

--EBITDA margins improve 50-100 bps during 2015;

--Debt/EBITDA at year end 2015 settles at around 1.0x, adjusted debt/EBITDAR is roughly 2.5x and FFO fixed charge coverage is at or above 3.5x;

--SHW generates FCF margins of 5.5%-6.5% during the next few years;

--Excess FCF will be used to pay down debt and fund additional share repurchases.

RATING SENSITIVITIES

Positive rating actions may be considered if the company's credit metrics improve meaningfully from current levels, including lease-adjusted leverage consistently below 2x and FFO fixed charge coverage at or above 4x.

Negative rating actions could occur if the company performs in line with Fitch's 2015/2016 stress case forecasts, including EBITDA margins falling to between 11% - 12% and lease adjusted leverage consistently exceeding 3x. Additionally, Fitch may consider a negative rating action if there is an adverse decision against the company related to lead-based paint litigation cases wherein the judgment will lead to higher debt levels and lease-adjusted leverage consistently above 3x.

Fitch currently rates SHW as follows with a Stable Outlook:

--Long-term IDR 'A-';

--Senior unsecured notes 'A-';

--Unsecured bank credit facilities 'A-';

--Short-term IDR 'F2';

--Commercial paper 'F2'.

Date of Relevant Committee: May 6, 2015

Additional information is available at www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosures

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=988629

Endorsement Policy

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

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View source version on businesswire.com: http://www.businesswire.com/news/home/20150728006303/en/

Fitch Ratings, Inc.
Primary Analyst
Robert Rulla, CPA
Director
+1-312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Robert Curran
Managing Director
+1-212-908-0515
or
Committee Chairperson
William Densmore
Senior Director
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or
Media Relations
Alyssa Castelli, +1-212-908-0540
[email protected]

Source: Fitch Ratings

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