March 1, 2012 / 2:51 PM / 5 years ago

TEXT-Fitch cuts Masco's IDR to 'BB'

 (The following statement was released by the rating agency)	
 March 1 - Fitch Ratings has downgraded Masco Corporation's 
(NYSE: MAS) ratings, including the company's Issuer Default Rating (IDR) to 'BB'
from 'BB+'. The Rating Outlook is Stable. A complete list of ratings follows at
the end of this release.	
	
The downgrade reflects the deterioration in Masco's operating profile and credit
metrics in 2011, which also fell short of Fitch's expectations. Masco ended
fiscal 2011 with debt to EBITDA (as calculated by Fitch) of 6.2 times (x). Fitch
had expected the company's leverage to be at or slightly above 5x at year-end
2011. Additionally, EBITDA to interest coverage of 2.5x and FFO interest
coverage of 1.7x during fiscal 2011 were also below Fitch's expectations.	
	
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 ratings also 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 Stable Outlook reflects Fitch's view of moderately improving housing and
home improvement markets in 2012 compared with 2011.	
	
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
issuance of roughly $400 million of new notes 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
free cash flow 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.	
	
Fitch has downgraded the following ratings for Masco:	
--Long-term IDR to 'BB' from 'BB+';	
--Senior unsecured notes to 'BB' from 'BB+';	
--Unsecured bank credit facility to 'BB' from '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. The
issuer did not participate in the rating process other than through the medium
of its public disclosure.	
	
Applicable Criteria and Related Research:	
--'Corporate Rating Methodology' (Aug. 12, 2011);	
--'Liquidity Considerations for Corporate Issuers' (June 12, 2007).	
	
Applicable Criteria and Related Research:	
Corporate Rating Methodology	
Liquidity Considerations for Corporate Issuers	
	
 (New York Ratings Team)	
 

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