S&P Places Ratings of Sherwin-Williams (SHW) on Review for Downgrade Amid Valspar (VAL) Deal

Standard & Poor's Ratings Services placed its 'A' corporate credit rating on Sherwin-Williams Co. (NYSE: SHW) on CreditWatch with negative implications, indicating we could lower the ratings once we complete our review. We also placed our 'A' issue-level ratings on Sherwin-Williams' senior unsecured debt and 'A-1' commercial paper rating on CreditWatch with negative implications.

"The CreditWatch placement follows Sherwin-Williams' announcement that it has signed a definitive agreement with Valspar Corp., under which Sherwin-Williams will acquire Valspar in an all-cash, largely debt-financed, transaction," said Standard & Poor's credit analyst Sebastian Pinto-Thomaz. "We expect the business risk profile of the combined entity to be strong as a result of increased geographic and product diversity," he added.

In our view, credit quality of 'A' rated Sherwin-Williams is likely to weaken considering the transaction's large debt-financed component. The transaction will be funded through a substantial increase in debt-financing and cash on Sherwin-Williams' balance sheet, which was approximately $205 million at year-end 2015. We expect that on a weighted average pro forma basis, leverage will fall to the significant (3x-4x adjusted debt/EBITDA) financial risk category from the currently modest (1x-2x adjusted debt/EBITDA) financial risk profile.

We will resolve the CreditWatch listing when the transaction closes, which based on the company's announcement, will take place in the first quarter of 2017. However, if Sherwin-Williams' financial profile deteriorates due to operating weakness in the next 12 months before the transaction closes, we will consider a downgrade.

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