PPG Industries Inc. Downgraded To 'BBB+' On Expected Demand, Earnings Drop; Outlook Negative

  • We anticipate a global economic recession in the first half of 2020 will hurt demand and earnings at PPG Industries Inc., leading to credit measures weaker than our previous expectations.
  • We are lowering our issuer credit rating on the company to 'BBB+' from 'A-'. The outlook is negative. We are also lowering our issue-level ratings by one notch to 'BBB+', in line with the issuer credit rating. We are affirming the short-term rating on 'A-2'.
  • We no longer expect positive growth and improved profitability in 2020.
  • The negative outlook reflects risks that macroeconomic conditions could weaken more than we anticipate and extend into next year, leading to more severe demand contraction and a funds from operations (FFO)-to-total debt ratio below 30% on a weighted-average basis.
NEW YORK (S&P Global Ratings) March 24, 2020—S&P Global Ratings today took the rating actions listed above. The rating action reflects challenging macroeconomic conditions over the next 12 months, which we expect will weaken credit measures. This comes as we had already viewed PPG's credit measures as somewhat weak for an 'A-' rating, following a year in which gross margins showed some improvement but remained below historical levels. S&P Global Ratings now forecasts a global recession in the first half of 2020, with a rebound in the second half leading to global GDP growth of 1% for the full year. In this environment, we expect coatings demand to decline, especially in PPG's more cyclical end markets, including architectural, automotive, and aerospace. We believe the coronavirus pandemic will reduce near-term demand because of government-mandated restrictions that lead people to defer activities such as home renovations, car purchases, and vacations. For the 'BBB+' rating, we would expect the FFO-to-debt ratio to average 30%-45%, and near the lower end of that range for this year.
The negative outlook reflects the potential for a lower rating if earnings and credit measures weaken beyond our base case because of a more severe or longer lasting macroeconomic downturn. This downside scenario would also include profitability deteriorating below our base-case expectations. In our base case, in line with S&P Global Ratings economic forecasts, we expect weaker credit measures in 2020 with reduced demand leading to mid-single-digit percentage organic sales declines in 2020, followed by a return to demand growth in 2021 and gradually improving credit measures thereafter. We continue to consider 95% of the cash on the balance sheet in our net debt calculation; we don't consider the remaining 5% because of currency risk and constraints, or costs related to repatriating cash.
The negative outlook reflects the potential for weaker earnings and credit measures in excess of our base case. Our base case factors in S&P Global Ratings economic assumptions for a global recession in the first half of 2020, with conditions rebounding somewhat in the second half, leading to global GDP growth of 1% for the full year. In this scenario, we expect demand for coatings to contract, especially in PPG's more cyclical end markets, including architectural, automotive, and aerospace. If the downturn is more severe or lasts longer than our base case, and preserving profitability proves challenging, we could reassess PPG's financial risk profile. The coatings industry has been the subject of frequent M&A rumors and activist investor interest. We will continue to monitor potential for transformational activity, although our rating does not reflect transformational events at PPG.
We could lower the rating if the global macroeconomic slowdown is more severe and lasts longer than our base case, extending coatings demand weakness. This could occur if governments impose mandates that limit economic activity in response to the coronavirus pandemic for an extended period, lengthening financial strain on businesses and consumers globally, and weakening demand for paints and coatings. We could lower ratings if revenue is 5% lower than our base case along with EBITDA margins declining by at least 150 basis points, resulting in the core ratio of FFO to debt falling below 30% on a weighted–average, sustained basis. We could also consider a downgrade if, despite this challenging operating environment, the company did not maintain financial policies that support the rating, for example through sizable debt-financed acquisitions or larger-than-expected share repurchases.
We could revise the outlook to stable if global macroeconomic activity rebounds faster than expected and PPG expands its profitability. This could occur if demand for coatings returns to pre-coronavirus levels in the second half of 2020, with little to no evidence of long-term demand destruction. We would also need to see profitability improvements by about 150 basis points from higher pricing, lower raw material costs, or lower operating expenses.
We work across the world

From London to San Francisco, to our home base in (Saint Helier) Jersey, we’re looking for extraordinary and creative scientists to help us drive the field forward.

AC Investment Inc. currently does not act as an equities executing broker or route orders containing equities securities. If AC Invest’s business model were to change and it begins routing non-directed orders in NMS securities, it will comply with the disclosure requirement of Rule 606.

77 Massachusetts Avenue Cambridge, MA 02139 617-253-1000 pr@ademcetinkaya.com