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Sherwin-Williams Company (The) -- Moody's upgrades Sherwin-Williams' ratings to Baa2; commercial paper rating to P-2

·15 min read

Rating Action: Moody's upgrades Sherwin-Williams' ratings to Baa2; commercial paper rating to P-2

Global Credit Research - 06 Aug 2020

New York, August 06, 2020 -- Moody's Investors Service ("Moody's") upgraded The Sherwin-Williams Company's ("Sherwin") senior unsecured ratings to Baa2 from Baa3 and upgraded the commercial paper rating to P-2 from P-3. The outlook is stable.

"Sherwin-Williams has demonstrated resilience during a historically difficult macroeconomic environment in 2020 and reduced debt by more than $2 billion since acquiring Valspar in June 2017, " said Ben Nelson, Moody's Vice President -- Senior Credit Officer and lead analyst for The Sherwin-Williams Company.

Upgrades:

..Issuer: Sherwin-Williams Company (The)

.... Commercial Paper, Upgraded to P-2 from P-3

....Senior Unsecured Regular Bond/Debenture, Upgraded to Baa2 from Baa3

Outlook Actions:

..Issuer: Sherwin-Williams Company (The)

....Outlook, Changed To Stable From Positive

RATINGS RATIONALE

Moody's upgraded the ratings to reflect continued improvement in the company's earnings, cash flow, and credit metrics despite an unprecedented shock from outbreaks of Coronavirus in the United States and around the world. Sherwin's business has held up better than rated peers in the coatings industry and the vast majority of rated chemical companies. Revenues fell modestly and EBITDA improved in the first half of 2020 following the company's aggressive pivot to focus on curbside pickup, delivery, and other methods to maintain business levels during rolling lockdowns, limitations on retail businesses, and adoption of social distancing policies across the United States. This demonstrated very clearly the strength and flexibility of its excellent brands, strong retail network, fleet of delivery vehicles, and customer-focused mentality. The company generated $1.8 billion of free cash flow over the past four quarters, maintained an excellent liquidity position, and successfully completed attractively-priced debt offerings.

Sherwin' Baa2 senior unsecured ratings balance the strength of the company's business model and stated intention to reduce leverage against longer-term event risk in a still-fragmented global coatings industry. The company's business model features an excellent position in the North American architectural paints business, strong retail network, and demonstrated ability to operate successfully through economic cycles. Acquiring Valspar Corporation (The) in June 2017 strengthened the company's growth platform in more industrially-oriented end markets and international geographies -- both of which remain modest contributors to earnings and cash flow today. Management reiterated an intention to reduce leverage to 2.0-2.5x (Debt/EBITDA; management's definition) and reported leverage of 2.8x on a trailing twelve months basis ending 30 June 2020. The rating incorporates that management will achieve this target in the coming quarters through a combination of earnings improvement and/or debt reduction. The rating also assumes that the company will continue to increase its regular dividend over time and resume share repurchases in the second half of 2020, which will slow deleveraging compared to a scenario where substantially all free cash flow is deployed toward debt reduction like 2018 and 2019. M&A opportunities in the coatings industry remain significant and event risk is a meaningful factor constraining the pace of improvement in the company's ratings.

Environmental, social, and governance factors are important factors influencing Sherwin-Williams' credit quality. The company is exposed to ESG issues typical for a company in the specialty chemical industry, including manufacturing products that are subject to specific regulatory scrutiny. Coatings companies typically have lower environmental risks related to manufacturing processes compared to other specialty chemical companies. Governance risks are similar to other publicly-traded chemical companies. The most significant ESG risk for Sherwin-Williams is social risk related the company's exposure to health and safety issues related to the legacy use of lead in coatings products. Sherwin-Williams has been successful at defending against lead paint litigation for the past several decades with modest expected cash payments today.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

The stable outlook assumes that adjusted financial leverage will track down into the 2.25-2.75x range and retained cash flow-to-debt will track above 20% (RCF/Debt) over the next 12-18 months. Moody's could upgrade the ratings with expectations for adjusted financial leverage sustained below 2.5x, retained cash flow-to-debt increasing toward 25%, and free cash flow-to-debt sustained comfortably above 10%. Moody's could also downgrade the ratings with expectations for adjusted financial leverage sustained above 3.0x, retained cash flow-to-debt sustained below 20%, or adoption of more aggressive financial policies.

Headquartered in Cleveland, Ohio, Sherwin-Williams is engaged in the manufacture, development, distribution, and sale of coatings and related products to professional, industrial, commercial, and retail customers. The company manufactures products under well-known brands such as Sherwin-Williams, Dutch Boy, Krylon, Minwax, Thompson's Water Seal, and many more. Sherwin-Williams branded products are sold exclusively through a chain of nearly 5,000 company-operated stores and facilities, while the company's other brands are sold through leading mass merchandisers, home centers, independent paint dealers, hardware stores, automotive retailers, and industrial distributors. The Sherwin-Williams Global Finishes Group distributes a wide range of products in more than 115 countries around the world. The company generated about $17.7 billion of revenue for the last twelve months ended 30 June 2020.

The principal methodology used in these ratings was Chemical Industry published in March 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1152388. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For 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_1133569.

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.

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.

Benjamin Nelson VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Glenn B. Eckert Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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