Fitch Ratings has affirmed Masco Corporation's (NYSE: MAS) ratings, including the company's Issuer Default Rating (IDR) at 'BB'. The Rating Outlook is Stable. A complete list of rating actions follows at the end of this release.
KEY RATING DRIVERS
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 sensitivity to general economic trends, as well as the cyclicality of the residential construction market.
The company's credit metrics for 2012 improved relative to 2011 levels. Leverage as measured by debt to EBITDA declined from 6.9x at the end of 2011 to 5.1x at year-end 2012. Interest coverage increased to 2.8x for fiscal 2012 compared with 2.3x for fiscal 2011. While these credit metrics are weak for the rating category, the rating affirmation reflects Fitch's expectation that Masco's financial results and credit metrics will improve again this year as the housing and home improvement markets continue their moderate recoveries. Fitch projects leverage will be slightly above 4x and interest coverage will be at 3.5x at the end of 2013.
The Stable Outlook reflects the expected continued improvement in housing and home improvement markets in 2013. The Stable Outlook also reflects the company's solid liquidity position. Masco ended the year with $1.35 billion of cash on the balance sheet and $873 million of availability under its $1.25 billion unsecured revolving credit facility that matures in January 2014. Fitch expects Masco's cash balance at the end of 2013 will remain above $1 billion.
EXPECTED CONTINUED IMPROVEMENT IN MASCO'S U.S. END-MARKETS
The company markets its products primarily to the residential construction market. During 2012, management estimates that 73% of its sales were directed to the repair and remodel segment, with the remaining 27% to the new construction market. Sales to North America accounted for about 78% of total revenues.
Fitch's housing forecasts for 2013 assume a modest rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new and existing home inventories at historically low levels, 2013 total housing starts should improve about 18.6% to 925,000, while new home sales increase approximately 22% and existing home sales grow 7.7%.
Fitch projects home improvement spending will grow 4% this year. Growth patterns in the intermediate term are likely to be below what the industry experienced during the previous housing boom and the early part of the past decade due to the slower expansion in the U.S. economy and only moderately better housing market conditions.
Growth in this segment will also be restrained by tight bank lending standards, which will make it difficult for homeowners to use credit to finance large remodeling projects. As such, Fitch expects spending for big-ticket remodeling projects to lag the overall growth in the home improvement sector.
Masco has taken steps to improve its balance sheet. The company supported its dividend and was an aggressive purchaser of its stock from 2003-2007, spending roughly $1.2 billion annually, on average, in share repurchases and dividends during this period. Masco has not repurchased stock since July 2008 and has put its share repurchase program on hold, except for repurchases to offset the dilutive effect of stock grants. In 2009, Masco also reduced its quarterly dividend from $0.235 per common share ($0.94 annually) to $.075 per share ($0.30 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.
STRONG LIQUIDITY POSITION
The company continues to have a solid liquidity position. Masco ended the year with $1.35 billion of cash on the balance sheet and $873 million of availability under its $1.25 billion unsecured revolving credit facility that matures in January 2014. Fitch expects Masco to have continued access to this facility as the company currently has sufficient cushion under the required covenants.
The company has $200 million of notes coming due in August 2013, which it intends to repay with cash on hand. Fitch expects Masco to continue to have cash in excess of $1 billion by year-end 2013.
Masco's historically strong free cash flow (FCF - Cash flow from operations less capital expenditures and dividends) generation diminished in 2011 and 2012 due to lower margins and profitability. During 2000 - 2010, Masco generated FCF in excess of $5.7 billion (Masco generated FCF of $220 million in 2010 and $414 million in 2009). The company was slightly FCF negative during 2011 and generated $55 million of FCF during 2012. Fitch currently expects Masco will generate between $150 million and $200 million of FCF during 2013.
Future ratings and Outlooks will be influenced by broad housing and home improvement market trends, as well as company specific activity, particularly free cash flow trends and uses.
The company's ratings are constrained in the near term because of the high leverage levels. However, a Positive Rating Outlook may be considered in the next 6-12 months if housing continues to rebound and the company's credit metrics are trending toward leverage levels close to 4x and interest coverage above 3.5x. An upgrade in the next 12-24 months may be considered if the company's leverage declines below 3.5x and interest coverage is consistently above 4.5x.
Negative rating actions could occur if the recoveries in Masco's end-markets are not sustained, leading to weaker than expected credit metrics. In particular, Fitch may consider a negative rating action if the company's leverage approaches 7x and interest coverage falls below 2.5x.
Fitch has affirmed the following ratings for Masco with a Stable Outlook:
--Long-term IDR at 'BB';
--Senior unsecured notes at 'BB';
--Unsecured bank credit facility at 'BB'.
Additional information is available at www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Evaluating Corporate Governance' (Dec. 12, 2012);
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).
Applicable Criteria and Related Research:
Liquidity Considerations for Corporate Issuers
Evaluating Corporate Governance
Corporate Rating Methodology