Sherwin-Williams Company (The) -- Moody's confirms Sherwin Williams' Senior Unsecured Rating at A3, assigns A3 rating to new notes, rating outlook is negative

New York, December 04, 2012 -- Moody's Investors Service today confirmed The Sherwin-Williams Company ("SHW") Senior Unsecured Rating at A3. Moody's also confirmed the ratings assigned to the company's various debt instruments as detailed below and assigned an A3 rating to the proposed 5 and 30 year notes that will be used to partially finance the acquisition of Consorcio Comex ("COMEX", Family owned/Not rated). The rating outlook is negative. Today's rating actions conclude the review for downgrade of SHW which commenced on November 13, 2012, after the announced acquisition of Comex. The company's commercial paper rating of Prime-2 was affirmed.

The following ratings were assigned:

$500 million 5 Year Senior Unsecured notes at A3

$250 million 30 Year Senior Unsecured notes at A3

The following ratings were confirmed:

Senior Unsecured Rating at A3

Senior Unsecured Shelf at (P)A3

The following rating was affirmed:

Commercial Paper ratings of P-2

RATINGS RATIONALE

The confirmation of SHW's A3 Senior Unsecured Rating reflects Moody's view that the proposed acquisition of Comex is highly complementary to SHW's existing businesses and will strengthen the company's geographic presence in Mexico in addition to improving Sherwin William's presence in the Southwestern United States. It will also provide the opportunity to improve operating margins through increased scale. Although the acquisition is strategically sound, the deal is credit negative because it will increase Sherwin-Williams' leverage substantially. The debt financed acquisition will increase debt/EBITDA considerably - we estimate pro-forma debt/EBITDA would be in the high 3x range (excluding any contribution from Comex) as compared to the low 2 times range before this transaction. The confirmation of the ratings takes into consideration SHW's strong performance in the first nine months of 2012 with revenue growth of approximately 9% and net earnings growth of 32%. We also considered Sherwin William's history of successful integration of smaller acquisitions such as Duron MAB and Columbia. The confirmation also reflects our expectation that SHW will meaningfully reduce absolute debt levels in the next 24 months, and that during this period the company will moderate share repurchases to enable free cash flow to reduce debt (we do expect some modest buybacks to offset dilution from exercise of stock options and continuation of the company's current dividend policies).

SHW's A3 senior unsecured rating reflects the scale and breadth of the company's market position in the North American coating industry through its 3700 store locations post acquisition, its consistent operating performance and its significant and growing international presence following the announced acquisition of Comex. The controlled distribution of `Sherwin-Williams' branded products remains a significant competitive advantage. While we believe there is limited downward pressure on industry coating volumes, the timing and magnitude of any recovery remains difficult to forecast.

SHW's ratings are constrained by the company's relatively narrow focus in the coatings sector. Demand for SHW's products is heavily exposed to the housing market, and trends in housing will continue to dictate much of the future demand. While we believe the company's manufacturing efficiency is world-class, increases in input cost, notably titanium dioxide could pressure the company's margins. While well managed, the company does have moderate risks associated with environmental matters as well as various litigation matters. The rating also considers the higher level of debt and interest associated with the recent transaction as well as our expectations the company will utilize free cash flow to reduce debt.

The negative outlook reflects the high leverage following the Comex acquisition and uncertainty surrounding Sherwin William's ability to seamlessly integrate Comex in a challenging economic environment. The outlook also reflects our expectation that the company's litigation and environmental risks will remain manageable and that the company will not initiate other significant acquisitions.

Ratings could be downgraded if recent positive trends in revenues and margins were to reverse. In view of the high leverage following this transaction, there is no significant capacity for additional acquisitions or any adverse outcomes on environmental or litigation matters. Quantitatively, a downgrade could occur if EBITA/interest were to move below 5.0 times, or if it appears unlikely the company will improve debt/EBITDA to below 3.0 times and retained cash flow/net debt above 22% within 18-24 months from closing of the acquisition.

In light of the proposed debt-financed acquisition the company is unlikely to be upgraded in the near term. Over time, the rating outlook could be stabilized if the company makes meaningful progress reducing leverage toward levels more appropriate for the A3 rating. Ratings could be upgraded if the company maintains stable earnings, while maintaining a balanced financial policy toward acquisitions and share repurchases. Environmental and litigation contingencies would also need to remain well contained. Quantitatively an upgrade would require the company to sustain retained cash flow/net debt above 30% and EBITA/interest above 6.5 times.

The principal methodology used in rating The Sherwin-Williams Company was the Global Retail Industry Methodology published in June 2011. Please see the Credit Policy page on www.moodys.com for a copy of this methodology.

Headquartered in Cleveland, Ohio, SHW is engaged in the development, manufacture, distribution and sale of paint, coatings and related products to professional, industrial, commercial and retail customers primarily in North and South America, with additional operations in the Caribbean region, Europe and Asia.

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