Standard & Poor's revises outlook on Masco to negative from stable, expects economic weakenss in Europe, cautious remodeling spending, to increase likelihood of weaker-than-expected full-year 2012 and 2013 results
August 15, 2012
"The outlook revision reflects our assessment that economic weakness in Europe; still cautious repair and remodeling spending in the U.S.; and inconsistent, but improving, housing market recovery has increased the likelihood that Masco's operating results and credit measures for full-year 2012 and 2013 will be weaker than our prior expectations," said Standard & Poor's credit analyst Thomas Nadramia. "We had expected modest year over year improvement."
In our previous base case scenario, Standard & Poor's forecasted Masco's credit measures to improve in the near term because of the significant restructuring charges and cost reductions the company has taken over the past three years. Our expectation was that the improved earnings would allow Masco to reduce debt to EBITDA to about 5x by year-end 2012 and about 4x by the end of 2013. However, Masco's second-quarter sales and EBITDA were less than our previous expectations due to:
Our 'BBB-' corporate credit ratings reflects our view of the company's "satisfactory" business risk. This assessment incorporates its leading market positions in a broad range of brand-name products in the home improvement and residential construction markets and its extensive and diverse distribution network. Our rating also reflects our view of Masco's "significant" financial risk--including cash and revolving credit facility availability totaling about $1.9 billion (after paying off the company's $791 million notes which matured in July 2012). The company has demonstrated an ability to generate free cash flow even during a severe downturn, and it has maintained very prudent financial policies since the housing and construction markets weakened in 2007. We continue to view the company's liquidity position as "strong," which provides some cushion relative to its low-investment-grade rating.
Masco has a broad portfolio of product offerings, including faucets, kitchen and bath cabinets, plumbing fittings, paints, and vinyl windows. In addition, the company has a large installation services business. Although sales are spread fairly evenly across Masco's segments, plumbing products and decorative architectural products have provided the bulk of the earnings during the prolonged period of low housing starts which began in 2008.
The negative outlook reflects our view that the risks relating to economic weakness in Europe, continued low levels of consumer remodeling spending, and that current housing starts could worsen from existing levels, could result in weaker-than-forecasted operating earnings and credit measures for Masco.
We could lower the rating if Masco's credit measures do not improve over the next several quarters as a result of weaker earnings, further economic weakness in its European markets, or lower-than-expected housing starts and remodeling activity. We would also lower the ratings if our view of future housing starts and other macro-economic conditions changes, and we believe it unlikely that Masco could reduce debt leverage to about 5x over the next several quarters and to 4.5x or lower by the end of 2013. In addition, we could also lower the rating if total liquidity (defined as cash on hand and availability under credit lines) falls below $1 billion as a result of the company needing to fund ongoing operating losses.
Although we are unlikely to raise the rating over the next 12 months because of our expectation for a slow recovery in repair and remodeling spending and still–low-levels of housing starts, we could upgrade Masco if the market recovers quicker than we anticipated, resulting in key credit measures improving to pre-downturn levels. This would include leverage of about 3x and funds from operations to debt of greater than 25%, which could occur if housing starts approached the 1 million annual level.
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