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Masco Corporation -- Moody's rates Masco's senior unsecured notes Baa2

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Rating Action: Moody's rates Masco's senior unsecured notes Baa2Global Credit Research - 18 Feb 2021New York, February 18, 2021 -- Moody's Investors Service (Moody's) assigned a Baa2 rating to Masco Corporation's proposed $1.5 billion senior unsecured notes with varying maturities. These notes will rank pari passu to the company's other unsecured debt. Masco's Baa2 senior unsecured ratings are not impacted by the proposed transactions. The outlook is stable.Moody's views the proposed transaction as credit positive since proceeds will be used to redeem the company's three unsecured senior unsecured notes due 2022, 2025 and 2026, removing any meaningful refinancing risks for the next seven years. The balance of the proceeds from the proposed offerings will be used to pay the call premium, accrued interest and related fees and expenses in a modestly leveraging transaction. Interest savings from the proposed refinancing could be upwards of $30 million, which is considerable relative to Masco's previous forecast of $135 million in interest payments for 2021."Masco is taking advantage of historically low interest rates by refinancing $1.3 billion in debt with long-term notes, which removes refinancing risks for the next seven years and substantially reduces its interest expense," according to Peter Doyle, a Moody's VP-Senior Analyst.The following ratings are affected by today's action:Assignments:..Issuer: Masco Corporation....Senior Unsecured Notes, Assigned Baa2RATINGS RATIONALEMasco's Baa2 senior unsecured rating reflects Moody's expectation of ongoing strong operating performance, with an EBITA margin projected to remain around 18% over the next two years. Higher volumes due to end-market growth and resulting operating leverage will contribute to continued profitability, offsetting potentially rising costs for commodities, such as titanium dioxide (for paints), zinc, copper, and resins. Moody's projects debt-to-LTM EBITDA remaining in the range of 2.0x -- 2.25x range through 2022 (2.3x at Q3 2020), and free cash flow-to-debt in excess of 15% over the same time period. Masco indicated that it intends to fully fund and annuitize its US Defined Benefits plan by the end of 2021, which will reduce the company's pension liability. Moody's does not include the potential for lower pension liabilities and resulting cash savings in our projections.Moody's projects revenue will grow to $7.8 billion for 2022 from about $7.2 billion for 2020. Moody's also calculates interest coverage, measured as EBITA-to-interest expense, will be in excess of 10x in late 2022. Moody's believes that the fundamentals for residential repair and remodeling activity, the main demand driver for Masco's products, will remain favorable and drive growth. Also, Moody's has a positive outlook for the US Homebuilding sector, which is another key revenue driver. Another credit strength is Masco's robust liquidity profile, characterized by free cash flow in excess of $500 million in each year through 2022, $1.3 billion of cash at December 31, 2020 and full access to a $1.0 billion revolving credit facility.However, Moody's believes that significant operating margin expansion beyond the rating agencies projections will be hard to achieve. Masco has significant distribution channel concentration to The Home Depot, which accounted for 39% of Masco's 2020 revenue. Also, Masco faces strong competition for its products, which makes material price growth difficult. Further, Moody's expects Masco will continue to enhance shareholder returns. In 2020, Masco spent about $727 million for share repurchases. Masco's Board of Directors recently authorized a new $2 billion share repurchase program, which replaces the prior authorization. This is capital that could otherwise be deployed towards enhancing liquidity for potential bolt-on acquisitions or for debt reduction.The stable outlook reflects Moody's expectation that Masco will continue to perform well, generate strong operating margin and cash flow, and maintain leverage below 3.0x. Substantial liquidity and conservative financial policies further support the stable outlook.FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGSFactors that could lead to an upgrade:» Debt-to-LTM EBITDA approaching 1.75x» EBITA margin is maintained near 15.0%» Free cash flow-to-debt is maintained above 15%» Preservation of robust liquidity» Maintain conservative financial policiesFactors that could lead to a downgrade:» Debt-to-LTM EBITDA is sustained above 3.0x» EBITA margin trending towards 12.5%» The company's liquidity profile deterioratesMasco Corporation, headquartered in Livonia, Michigan, is among the largest North American manufacturers of a number of home improvement and building products, including faucets, architectural coatings, and lighting.The principal methodology used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.REGULATORY DISCLOSURESFor further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating. Peter Doyle Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. 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