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Announcement:

Moody's affirms RPM's Baa3 ratings and stable outlook

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 over time."

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.

Ratings affirmed:

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 earnings increase.

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 website.

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.

New York
William Reed
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms RPM's Baa3 ratings and stable outlook
No Related Data.
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