S&P rates RPM convert at BBB

Standard & Poor's assigned a BBB rating to RPM International Inc.'s proposed $248 million face senior convertible notes due 2033 and affirmed its existing ratings.

As of Feb. 28, the company reported $700 million in total debt.

Credit quality encompasses diverse businesses, a respectable long-term sales and earnings record and expected further reduction of its aggressive debt load using cash from operations.

No debt-financed acquisition has been made during the past few years, modestly strengthening credit quality measures. Moreover, keeping capital expenditures below depreciation and amortization expense is a plus for discretionary funds generation, a portion of which is being used to reduce debt with the balance for acquisitions, S&P said.

Still, the high common dividend payout ratio meaningfully limits ability to generate discretionary cash flow necessary to fully restore the financial profile.

Funds from operations to total debt ratio has improved to 24% from 30%. Further strengthening of EBIT interest coverage, fully satisfactory in the 6x area, is possible, with lower interest expense.

RPM has a $125 million accounts receivable securitization program and $190 million remains available under its $500 million revolving credit facility maturing in 2005.

S&P noted that there is a rating trigger on the new convertible if the notes fall below BB+ by S&P, or lower by another rating agency.

The outlook is negative.

While rising earnings and debt reduction have the potential to strengthen subpar cash flow protection measures in the next year or so, significant acquisitions also may take place and, absent a disciplined funding approach, the long-term debt rating could be lowered, S&P said.

Moody's rates RPM at Baa3, cuts outlook

Moody's Investors Service assigned a Baa3 rating to RPM International Inc.'s new convertible bonds and confirmed its existing ratings, but changed the outlook to negative from stable.

The negative outlook reflects concern over the increasing number of new product liability cases and the expected depletion of insurance coverage for these liabilities in the first half of fiscal 2004. Moody's currently estimates that yearly costs related to these liabilities could run in the range of $30-40 million, once RPM depletes its insurance coverage, or $20-25 million on an after-tax basis.

The ratings reflect an improving operational profile due to restructuring efforts in fiscal 2001 that have begun to generate higher margins and free cash flow. Gross cash flow to debt of over 25% is relatively strong for a stable Baa3 issuer.

Given the expected increase in liability related expenses, Moody's believes that RPM acquisition activity will be limited until the ultimate cash impact of this issue becomes more transparent.

Moody's currently estimates that RPM should be able to generate at least $50 million of free cash flow after adjusting for the future increase in product liability expenses.

In addition, Moody's anticipates that management will conserve cash and adjust debt levels downward if operating and cash flow performance does not match anticipated levels over the near-term.

S&P puts EDS on watch

Standard & Poor's placed the long-term ratings of Electronic Data Systems Corp. on negative watch, due to weak operations and contract delays.

Moreover, S&P said the watch reflects continued weak operational performance in each of EDS' major lines of business.

Additional slippage in the U.S. Navy and Marine Corp. contract, which also included a delay in the crossover point to becoming cash flow positive, is a concern as well. The ratings had been based on the expectation that the deployment and cash flow schedule for the contract would remain on track.

In addition, first-quarter operating margins were 5%, narrowed from 11% a year earlier, reflecting delivery issues in outsourcing, market pressures, declines in higher margin discretionary IT services spending and the new General Motors Corp. sector agreements.

The announced "comprehensive strategic and operating review" by EDS management, which will not be completed until June, may affect the outlook for 2003 and beyond for earnings and cash flow, S&P noted.

Although management's targets include improved competitiveness, renewed growth and a strengthened balance sheet, the costs, execution risks and change to the business profile arising from the strategic review are unclear at this point, S&P said.

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