The downgrade reflected Fitch's expectation that leverage will materially increase (at least for a time) and credit metrics will be significantly weaker following the acquisition.
The affirmation of the ratings reflects a geographically well-balanced company with a heightened focus on its coatings and optical businesses, consistent strong earnings and excellent cash flow. Risk factors include a higher leverage profile, the cyclicality of many of PPG's end markets, volatile raw materials and energy costs, and the company's exposure to asbestos litigation.
The Negative Outlook reflects the higher than anticipated debt incurred to finance the transaction, the refinancing risk associated with PPG's EUR1 billion 364-day bridge loan facility, and possible integration risks associated with the SigmaKalon acquisition. Management had expected to finance part of the transaction from asset divestitures, but the planned divestiture of its auto glass business was cancelled at the end of 2007, leaving PPG to finance a majority of the acquisition with debt. Going forward, the potential for significant cash flow from the divestiture of the company's auto glass business (if used to pay down debt) and moderation in share repurchases could meaningfully reduce leverage, and result in a Stable Outlook.
PPG generates significant cash flow - over $1 billion in each of the past four fiscal years. In the past, the company has been consistent in prioritizing the uses of its cash and cash flow and Fitch expects management to maintain the same discipline going forward. Following a string of acquisitions between 1997 and 2000, PPG has paid down about $1.8 billion of debt since 2001.
Over the past decade, PPG has revamped its business portfolio to achieve faster growth, less cyclical growth, and lower capital intensity. The acquisition of SigmaKalon and the company's completed and planned asset divestitures further reflect PPG's transformation into primarily a coatings and specialty products company. Fitch expects management to remain disciplined in its growth strategy and continue to make selective acquisitions largely to grow its coatings and optical businesses.