Chicago-Fitch Ratings has assigned a 'BB' rating to Masco Corporation's (NYSE: MAS) proposed offering of $400 million senior notes due 2022. The new issue 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 the repayment of a portion of the company's $791 million senior notes due on July 15, 2012.
On March 1, 2012, Fitch downgraded the company's ratings to 'BB' from 'BB+'. The Rating Outlook is Stable. Fitch currently rates Masco as follows.
--Long-term Issuer Default Rating (IDR) at 'BB';
--Senior unsecured notes at 'BB';
--Unsecured bank credit facility at 'BB'.
The ratings reflect Masco's leading market position with strong brand recognition in its various business segments, the breadth of its product offerings, and solid liquidity position. Risk factors include weak operating margins and credit metrics, sensitivity to general economic trends, as well as the cyclicality of the residential construction market.
The Stable Outlook reflects Fitch's view of moderately improving housing and home improvement markets in 2012 compared with 2011.
Masco's margins and credit metrics have deteriorated over the past year. Masco ended fiscal 2011 with debt to EBITDA (as calculated by Fitch) of 6.2 times (x) compared with 5.3x at year-end 2010. EBITDA to interest coverage declined from 3.1x in 2010 to 2.5x in 2011 while funds from operations (FFO) interest coverage fell from 2.4x in 2010 to 1.7x in 2011.
Fitch does not expect a meaningful improvement in Masco's financial performance this year as housing, although expected to grow modestly, remains very weak in absolute terms and spending for big ticket renovation continues to be constrained. Additionally, raw material costs are expected to remain elevated for Masco's paint products during 2012. Although the company is expected to reduce debt by roughly $400 million this year, Fitch projects Masco's leverage will remain elevated in the intermediate term and is expected to continue to be above 5x in 2012. Fitch also projects interest coverage ratios to improve only marginally this year compared with 2011.
Masco's historically strong free cash flow (FCF; cash flow from operations less capital expenditures and dividends) generation diminished in 2011. During the past decade, the company generated significant FCF, even during periods when revenues and profitability declined. During the 2000 - 2010 periods, Masco generated FCF in excess of $5.7 billion. (Masco generated FCF of $220 million in 2010 and $414 million in 2009). In 2011, the company was slightly FCF negative. Fitch currently expects Masco to generate minimal FCF in 2012.
The Stable Outlook also reflects the company's solid liquidity position, although this is expected to decline moderately this year due to an upcoming debt maturity. Masco ended the year with $1.66 billion of cash on the balance sheet and $630 million of availability under its $1.25 billion unsecured revolving credit facility that matures in January 2014. The company has $791 million of notes coming due in July 2012, which it intends to repay with the proposed notes issuance and cash on hand. Fitch expects Masco to continue to have cash in excess of $1 billion by year-end 2012.
In February 2012, the company amended its revolving credit facility, which provided for certain add-backs to shareholder's equity in its covenant calculation for certain non-cash charges taken in 2010 and 2011. This amendment increased the company's borrowing availability under the revolver from $178 million to $630 million. The company indicated that as of Dec. 31, 2011, the company can absorb a reduction in shareholder's equity of $340 million and remain in compliance with its leverage covenant. Fitch expects Masco to continue to have access to its revolving credit facility, although the amount available will likely continue to be lower than the total facility amount due to covenant constraints.
Fitch is encouraged that management has taken steps to preserve its liquidity during these still uncertain times. Masco had been an aggressive purchaser of its stock starting in 2003, spending about $1.2 billion annually, on average, in share repurchases and dividends during the 2003-2007 periods. The company has not repurchased stock since July 2008 and has put its share repurchase program on hold, except for stock buybacks to offset the dilutive effect of stock grants. In March 2009, Masco also reduced its quarterly dividend from $.235 per common share ($.94 annually) to $0.075 per share ($.30 annually), saving approximately $225 million per year. Fitch expects the company will preserve its strong liquidity position and refrain from meaningful share repurchases through at least this year.
Fitch's rating also takes into account the cyclicality of Masco's end markets. Fitch's housing forecasts for 2012 assume a modest rise off a very low bottom. New home inventories are at historically low levels and affordability is at near record highs. In a slowly growing economy with distressed home sales competition similar to 2011, less competitive rental cost alternatives, and, probably, even lower mortgage rates, total housing starts should improve almost 7% to 650,000 homes, while new home sales increase approximately 5.6% to 319,000 and existing home sales grow 3% to 4.388 million.
The home improvement industry has shown moderate recovery during the past two years. Fitch currently projects home improvement spending will grow 4% in 2012. Remodeling expenditures are likely to continue to pick up this year as homeowners who deferred maintenance and/or improvements during the recent recession start revisiting these projects. The gradual improvement in the economy and moderately better housing market conditions could provide the catalyst for a slightly more robust increase in spending for home remodeling projects this year as compared to the estimated 3% growth in 2011. However, Fitch expects spending on big ticket renovations will remain constrained as credit availability remains tight and returns on home improvement projects continue to fall.
Future ratings and outlooks will be influenced by broad housing and home improvement market trends, as well as company specific activity, particularly FCF trends and uses. Masco's rating is constrained in the intermediate term due to weak credit metrics, but a Positive Rating Outlook may be considered if the recovery in housing metrics and home improvement spending is significantly better than Fitch's outlook and the company significantly improves its credit metrics above Fitch's current expectations. Negative rating actions could occur if the anticipated recoveries in Masco's end-markets do not materialize and/or if management resumes a meaningful share repurchase program before a clearly established recovery has began in the housing and home improvement markets.
Source: Fitch Ratings
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