S&P lowers Masco's corporate credit rating to BBB- from BBB, issue level rating on senior bonds to BBB- from BBB
November 3, 2011
"The downgrade reflects our assessment that the U.S. housing market recovery will be weaker than we previously anticipated, and that repair and remodeling spending by consumers is likely to remain cautious given continued high unemployment and difficult consumer credit markets," said Standard & Poor's credit analyst Masco Corp. As a result, we have revised our assessment of Masco's financial risk profile to significant from intermediate based on our view that the company's credit measures are now likely to be more in-line with the current ratings, given our view of its satisfactory business risk profile. We continue to view the company's liquidity position as strong, which provides ratings support at the investment-grade level.
Our assessment of the company's satisfactory business risk profile incorporates its leading market positions for a broad range of brand-name products in the home improvement and residential construction markets, as well as its extensive and diverse distribution network, and its significant financial risk profile, including cash and revolving credit facility availability totaling about $2.7 billion, demonstrated ability to generate sizable free cash flow even during a severe downturn, and very prudent financial policies.
Our stable outlook acknowledges the company's strong liquidity profile, which we view as an underpinning to the investment-grade rating. We expect the company's strong liquidity will enable Masco to weather several more years of weak sales and earnings while meeting all obligations.
We could lower the ratings if earnings are materially weaker than we expect, caused by a severe double-dip recession or a material drop in housing starts and remodeling activity, causing large cash losses such that total liquidity (defined as cash on hand and availability under its lines of credit) fell below $1 billion. We could also lower the ratings if a much more aggressive financial policy, albeit unlikely in our opinion, utilized large amounts of cash for shareholder remuneration or acquisitions.
While an positive rating action is unlikely over the next 12 months because of our expectation for more muted recovery prospects, we would upgrade Masco if the market recovers more quickly than anticipated and key credit measures improved to predownturn levels of average leverage of about 3x and FFO to debt of greater than 25%.