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Fitch Expects to Rate PPG Industries' EUR300MM Debt Issue 'A'

Published on 2005-06-13. Author : SpecialChem

NEW YORK -- Fitch Ratings expects to assign an 'A' rating to PPG Industries, Inc.'s (PPG) proposed EUR300 million senior unsecured notes due June 23, 2015. The Rating Outlook is Stable. The issue will be ranked on a pari passu basis with all other senior unsecured debt, including the company's revolving credit agreement. Proceeds from the offering will be used to redeem up to $275 million in aggregate principal amount of its 6.50% notes due 2007, 7.05% notes due 2009, 6.875% notes due 2012 and for general corporate purposes.

The rating for PPG is based on the company's strong balance sheet, supported by excellent cash flow. Risk factors include the cyclicality of many of PPG's end markets, currently increasing raw material costs, and the company's exposure to asbestos litigation. The Stable Outlook reflects Fitch's expectation that PPG will be able to maintain (or improve) its credit profile. Fitch also expects the company to execute a disciplined growth strategy and consistent free cash flow generation.

PPG has a strong balance sheet, supported by excellent cash flow. PPG's debt-to-capitalization ratio has been declining in recent years, decreasing from 47.3% at the end of fiscal 2002 to 35.3% in fiscal 2003 and to 26.9% at the end of fiscal 2004. The ratio improved further to 26.2% at the end of first-quarter 2005 (1Q05). The company has a targeted gross debt to capitalization ratio of 30%-40%. Total adjusted debt-to-adjusted-capitalization ratio was 46.3% at the end of 1Q05 compared with 46.5% at the end of 2004 and 53.8% at the end of 2003. This takes into account $1 billion of off-balance sheet debt (8 times (x) 2004 gross rent) and $856 million of asbestos liability (present value of gross asbestos settlement payments as reported on the company's balance sheet). PPG does have substantial goodwill and other intangibles of $1.7 billion as of March 31, 2005 (representing 47% of shareholders equity), as a result of its past acquisitions.

PPG maintains ample liquidity with $640 million of cash, $1 billion of availability under the company's revolving credit agreement, and its solid free cash flow generation. PPG realized over $525 million of net free cash flow (EBITDA less capital expenditures less cash interest less cash taxes plus change in working capital) in each of the past four years ($674 million in fiscal 2004). Net free cash flow was used to pay down $1.6 billion of debt since 2001. In the next 12 months, Fitch expects PPG will use cash on hand and net free cash flow to support dividend payments, meet debt maturities, opportunistically fund its pension plan, make cash payments for its asbestos liability, potentially fund moderate-sized acquisitions, and support its $500 million stock repurchase program announced in January. EBITDA/interest incurred improved from 12x for fiscal 2003 to 16.6x for fiscal 2004 and to 17.3x for the LTM from March 31, 2005.

PPG has put together an investment guideline that places its various business segments in a matrix, identifying value drivers (segments that have market leadership positions and competitive cost structure) and supporting business segments (those that generate cash and have cost leadership positions). Currently, the entire coatings group (with the exception of packaging), optical products, and insurance and services businesses are classified as value drivers. Management's strategy is to redeploy cash generated by its supporting businesses (most of chemicals and glass) to the businesses identified as value drivers. Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. In the late 1990s, PPG made a series of major acquisitions to expand its coatings businesses. Between 1997 and 2000, the company spent more than $2 billion on acquisitions, mostly in the coatings field. During that time, PPG also divested businesses that were not meeting strategic and performance objectives. In 1998, PPG completed the sale of its European flat glass and automotive glass businesses. Fitch expects that management will continue to redeploy cash generated by its supporting segments to prudently fund its core businesses and may make selective acquisitions (primarily focused on coatings and optical companies/assets).

Fitch's rating takes into account the cyclicality of many of PPG's end markets. Construction and automotive OEM account for approximately 48% of its end markets' sales. However, it is important to note that about 10% of sales are directed to the more resilient construction remodeling market. Fitch expects 2005 domestic vehicle production volume to be in a range of flat to negative 3%. Similarly, Fitch expects modest declines in single and multifamily housing starts, along with new home sales, in 2005. However, this should be partly offset by a recovery in the commercial and industrial construction market, as well as the continuing strength of the chemicals industry. During the most recent economic slowdown, PPG continued to generate robust cash flow. Fitch expects that the company's strong balance sheet and continued focus on cost reduction will allow the company to navigate through a somewhat more challenging economic environment in 2005.

The increase in raw material costs continues to put pressure on PPG's margins. Two important categories of cost to PPG are energy (largely for natural gas) and coatings raw materials. PPG uses 60 to 70 trillion Btus of natural gas a year to generate power for the production of chlorine and caustic soda and to produce glass and fiberglass. During the first quarter of fiscal 2005, PPG's average all-in cost for natural gas was $6.40 per million Btu, down slightly from $6.50 in the fourth quarter of 2004. PPG's average cost one year ago was $5.60 per million Btu. Similarly, coatings raw material costs in the first quarter were up about $50 million versus the year-ago quarter. Management indicated that costs have been rising for the past seven months, and Fitch expects this trend to continue in the short term as energy prices stay high. These cost increases should be partly offset by savings realized from manufacturing efficiencies and by price increases.

The company has been a defendant in lawsuits involving asbestos claims for over 30 years, mostly related to its 50% ownership of Pittsburgh Corning Corporation (PC), a 50-50 venture owned by PPG and Corning Incorporated. In May 2002, PPG agreed to a $2.7 billion settlement agreement of outstanding asbestos claims against PPG and PC. Under the settlement agreement, PPG would make aggregate cash payments of approximately $998 million (payable according to a fixed payment schedule over 21 years), contribute 1.4 million shares of its stock, and convey the stock it owns in PC to a trust. PPG's participating historical insurance carriers would make cash payments to the trust of approximately $1.7 billion. The settlement agreement is still pending. If the asbestos settlement becomes effective in 2005, PPG will make a $290 million payment to satisfy the payment schedule outlined in the settlement. The company clearly has sufficient cash flow and liquidity to meet its asbestos liability payments.

Founded in 1883, PPG is a global supplier of coatings, glass, fiberglass, and chemicals. The company has 108 manufacturing facilities and equity affiliates in more than 20 countries. PPG is the world's largest producer of transportation coatings and a leading maker of industrial and packaging coatings, architectural coatings, aircraft transparencies, flat and fabricated glass, continuous-strand fiberglass, and chlor-alkali and specialty chemicals.

Source: Fitch Ratings


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