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Global Credit Research - 01 Jun 2010
Approximately $900 million of rated debt affirmed
New York, June 01, 2010 -- Moody's Investors Service affirms RPM International Inc.'s
(RPM) Baa3 ratings after RPM announced plans to resolve the asbestos litigation
involving subsidiaries Specialty Products Holding Corp. (SPHC)
and Bondex International Inc. (Bondex) via the establishment of
a 524(g) bankruptcy trust (Trust). Moody's affirmation of
RPM's ratings, despite the vagaries of litigation and the
uncertainty surrounding court rulings, assumes that the filing will
result in the cessation of all current asbestos liability claims and that
RPM's ultimate net exposure will be no worse than the current long
lived efforts at resolving claims in state courts. Moody's
estimates that final resolution will not take place for 3-4 years.
The initial credit implications prior to a final settlement are modestly
positive in terms of cash flow and the deconsolidation of the asbestos
balance sheet reserve, which resides on Bondex's balance sheet.
Moody's expects the filing will have no near term impact on current
credit facilities and public debt.
Approval of the plan will require agreement by at least 75% of,
yet to be determined, claimants and by the US courts. The
plans for a Trust are set up via a chapter 11 filing for SPHC/Bondex and
the ultimate establishment of a Trust possibly funded with a combination
of cash, equity, and notes. The assets of SPHC/Bondex
include the stock of discrete operating companies. RPM has disclosed
that the combined revenues and pre-tax income of these entities,
for the 2009 fiscal year, were about $330 million and $20
million respectively, representing less than 10% of revenues
and 11% of consolidated pre-tax income. The final
plan, when approved, aims at achieving a permanent injunction
limiting asbestos litigation to SPHC/Bondex thus capping RPM's total
asbestos exposure and ending the administration and legal efforts related
to this matter. Generally, Moody's considers a resolution
of asbestos-related claims which places an effective cap on asbestos
cost as positive as long as the additional cost in terms of cash flow
and assets lost can be absorbed with Baa3 credit metrics and indirect
effects on RPM's remaining business are considered immaterial.
Moody's has identified RPM's asbestos exposure in its research on
the company and factored potential cost and resolution scenarios into
its rating analysis. In an Issuer Comment in July 2008, Moody's
said: "RPM recently increased its asbestos reserve position
by $288 million to $560 million (at February 28, 2010
the reserve was $430 million on an undiscounted basis) representing
an extension of the reserve life from a current 10 year life to a 20 year
life ending in 2028. Given the expected declining nature of the
reserve, combined with RPM's steady business profile, Moody's
believes that the current Baa3 rating and stable outlook incorporate the
magnitude and scope of the asbestos issue as it is estimated at this time.
The reserves are expected to be drawn down as expenditures are made for
indemnity and defense costs in coming years, and adjusted when necessary.
Moody's expects the annual draw down of this reserve will be higher in
its earlier years and the annual impact will begin to materially decline
In fiscal 2010 Moody's estimates, RPM has paid $75
million ($49 million after tax) for asbestos settlements and legal
defense. These payments will be stayed while the plan is negotiated
and approved. If the plan is finalized RPM would effectively be
able to replace these cash payments and the distractions and uncertainties
of the legal proceedings with the contribution to a yet to be defined
trust fund to be finalized presumably several years from now. Moody's
believes that this amount could be materially less than RPM's current
estimated reserves given the possibility of different estimates used to
measure the asbestos claims liability in bankruptcy. Additionally
Moody's believes management is committed to achieving and maintaining
an efficient balance sheet, consistent with a Baa3 rating.
The company's credit profile continues to benefit from a diverse portfolio
of products that supply various consumer and industrial end-markets.
Furthermore, RPM has many well-known brand names including
Rust-Oleum, Bondo, Zinsser, and DAP. Most
of RPM's products are specialty coatings and sealants with applications
in corrosion control, waterproofing, sealing, flooring
and roofing. The ratings affirmation reflects our continued belief
that RPM will meet the retained cash flow to total adjusted debt ratio
of at least 20%, on a sustained basis.
RPM International Inc.
Senior unsecured notes - Baa3
Senior unsecured shelf - (P)Baa3
Subordinate shelf - (P)Ba1
RPM United Kingdom G.P
Guaranteed senior unsecured notes -- Baa3
The Baa3 rating reflects our expectation that RPM will not pursue large
debt financed acquisitions and instead continue its historic focus on
bolt-on acquisitions and joint ventures to augment organic growth.
Additionally, RPM's rating is tempered by an elevated dividend and
the expectation that management will continue to raise the dividend as
RPM's renewal of its accounts receivable facility for three years and
the amendment to its $400 million revolver due December 2011 relaxing
the covenants are, on the margin, credit positives.
The altered covenant definitions plus the addition of a new fixed charge
ratio covenant serve to both relax and in some ways provide the potential
for future discipline on capex and dividend cash flows which form a portion
of the denominator of the covenant. This ratio, which is
required to be 1.00 to 1.00, may exhibit some possible
tightness, if the economy were to weaken, during fiscal 2010
and 2011. Any tightness, however, could be remedied
with discipline in capex and dividend policies along with the benefit
of cost cutting initiatives which should bolster EBITDA.
RPM's stable outlook reflects the expected cessation of asbestos payments
combined with the uncertainty over the negotiated size of the Trust's
assets, as a function of the size of the liability, and timing
of their placement in the Trust. Further reflected in the stable
outlook is the generation of stable cash flows along with management's
record of maintaining a relatively conservative financial profile.
If the ratio of retained cash flow to total adjusted debt were to drop
to below 20%, on a sustained basis, or if a large debt
financed acquisition or share repurchase program were to cause this ratio
to decline to below 20%, a review or lower ratings may be
triggered. If management becomes more aggressive with its dividend
policy, significantly increases its share repurchases, or
takes other actions that are likely to materially weaken credit metrics,
we could reassess the appropriateness of the company's Baa3 ratings.
Moody's most recent announcement concerning the ratings for RPM was on
October 6, 2009, when we assigned a Baa3 rating on RPM's
senior unsecured notes.
The principal methodology used in rating RPM was Moody's Global Chemical
Industry rating methodology, published in December 2009 and available
on www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
RPM International Inc. (RPM), headquartered in Medina,
Ohio, is a holding company, whose subsidiaries are manufacturers
of specialty coating and other products for both industrial/professional
and retail do-it-yourself markets. Sales on an LTM
basis ending February 28, 2010 were $3.3 billion.
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
Moody's affirms RPM's Baa3 ratings and stable outlook
Corporate Finance Group
Moody's Investors Service
No Related Data.
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