OREANDA-NEWS. Fitch Ratings has assigned a 'BBB-' rating to James Hardie Industries plc's (ASX: JHX, James Hardie) proposed offering of $75 million of senior unsecured notes due 2023. The notes will be issued by James Hardie's wholly-owned subsidiary, James Hardie International Finance Limited. This issuance is an add-on to the company's existing $325 million 5.875% senior unsecured notes due 2023 that was issued in February 2015. The proceeds from the notes issuance will be used for general corporate purposes. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings for James Hardie reflect the company's dominant market position within the fibre cement industry, relatively diversified geographic and end-market diversity, and conservative financial strategy. Risks include the cyclicality of the company's end markets, somewhat aggressive (although disciplined) growth strategy, some customer concentration and exposure to asbestos liabilities. The Stable Outlook reflects Fitch's expectation that the company's end-markets within the U. S. will continue to improve in 2016 and 2017.

STRONG CREDIT METRICS

Leverage as measured by debt to EBITDA was 1.4x and funds from operations (FFO) adjusted leverage was 2.0x at the end of fiscal year (FY) 2016 (ending March 31, 2016). Fitch expects debt to EBITDA will settle between 1.5x-1.7x at the end of FY17. This is in line with management's goal of managing net debt to EBITDA between 1.0x-2.0x. FFO adjusted leverage is projected to be between 2.0x-2.5x at the conclusion of FY17.

The company reported EBITDA to interest coverage of 18.3x and FFO interest coverage of 14.8x during FY16. Coverage ratios are projected to remain strong, with EBITDA to interest coverage and FFO interest coverage remaining at or above 10x during FY17.

ASBESTOS PAYMENTS

James Hardie is required to make payments to a special purpose fund that provides compensation for Australian asbestos-related personal injury and death claims for which certain former James Hardie companies are liable. In 2006, the company entered into an Amended and Restated Final Funding Agreement (AFFA) with the New South Wales government related to these asbestos claims. The AFFA requires James Hardie to contribute up to 35% of its annual free cash flow (FCF; defined as operating cash flow) to the Asbestos Injuries Compensation Fund (AICF). Between 2007 and 2016, James Hardie has contributed A$919.7 million to the AICF, including A$120.7 million ($91.1 million) paid on July 1, 2016.

Although James Hardie has no legal ownership of the AICF, it consolidates the financials of the AICF for financial reporting purposes. The consolidation results in a separate accounting recognition of the asbestos liability that is not, in Fitch's view, a reflection of James Hardie's annual funding obligation. As of March 31, 2016, James Hardie reported asbestos liabilities of $1.3 billion, which is based on the actuarial estimate of future asbestos related cash flows as prepared on an annual basis by KPMG Australia. The net unfunded AFFA liability, net of tax, was $766.7 million at March 31, 2016.

Fitch does not include the asbestos liability as debt in calculating James Hardie's financial ratios. However, Fitch subtracts the actual annual cash outflow (paid to the AICF) in its calculation of recurring EBITDA. James Hardie's FFO and FCF measures are also reduced by the asbestos cash payments. Fitch believes that this method of treating the liability and the cash outflow best represents the risk associated with this contingent liability.

LEADING MARKET POSITION

James Hardie is a world leader in manufacturing fibre cement siding and backerboard. Based on net sales, the company believes that it is the largest manufacturer of fibre cement products and systems for internal and external building construction applications in the U. S., Australia, New Zealand and the Philippines. Within the U. S., James Hardie believes that it has approximately 90% category share of fibre cement sales. However, the company competes with alternative siding products, including vinyl and wood siding as well as bricks, stucco and engineered wood products. Based on census data, fibre cement accounted for about 19% of the exterior siding material for new single-family homes completed during calendar year 2015 (from about 9% in 2005).

Fitch believes that this leadership position provides James Hardie with competitive advantages such as economies of scale, access to a wider range of distribution channels and a strong platform to execute its growth initiatives and geographic expansion.

GROWTH STRATEGY

James Hardie's growth initiative revolves around the execution of its 35/90 strategy, which, over the long term, aims to increase fibre cement's share of the total U. S. sidings market to approximately 35% (from 19% currently) and to maintain the company's roughly 90% category share of fibre cement sales.

James Hardie has significantly rebalanced its prior capacity expansion plans to match demand. (Management had previously expected to spend, on average, approximately $200 million annually on capex during FYs 2015-2017.) During FY16, the company spent $73.2 million on capex (4.2% of revenues). This compares to $276 million (16.7%) during FY15 and $115.4 million (7.7%) during FY14. James Hardie also increased efficiency in its current network, which improved margins and assisted in pushing out some of its capacity expansion plans. Fitch expects capex will be roughly 4%-6% of revenues in the next few years. Fitch is encouraged that the company quickly scaled back its capacity expansion plans when demand growth was not as robust as previously anticipated.

CAPITAL ALLOCATION STRATEGY

The company expects to pay ordinary dividends within its defined payout ratio (between 50%-70% of net profit after taxes). The company did not pay ordinary dividends during FY10 and FY11 and paid $17.4 million in FY12, $188.5 million in FY13, $93 million in FY14, $176.5 million in FY15 and $153.7 million during FY16. In May 2016, the company announced an ordinary dividend of $0.29 per share (roughly $129.1 million) payable in August 2016.

James Hardie paid special dividends totaling $106.1 million during FY14, $213.6 million during FY15 and $92.8 million during FY16. Management has indicated that it is unlikely that the company will continue to pay special dividends. Instead, the company may deploy excess cash for share repurchases. The company expects to allocate about $100 million on share repurchases during FY17 compared with $22.3 million in FY16 and $9.1 million in FY15.

LIQUIDITY AND FREE CASH FLOW

As of March 31, 2016, the company had cash of $107.1 million and $310 million of borrowing availability under its $500 million revolving credit facility that matures on Dec. 10, 2020. Fitch believes that James Hardie will continue to have access to its revolving credit facility as the company has sufficient room under the revolver's financial covenants.

The company generated negative $59 million of FCF (cash flow from operations less capex and dividends [including special dividends]) during FY16. By comparison, the company reported negative $486.8 million of FCF during FY15. Fitch expects the company will be FCF neutral during FY17, which assumes no special dividends and includes the $91 million payment made to the asbestos fund in July 2016.

CONTINUED IMPROVEMENT IN U. S. HOUSING

After four years of a moderate housing recovery, it is unlikely that housing will accelerate into a V-shaped recovery. But a continuation of a multi-year growth is in the offing, and is supported by demographics, pent-up demand and attractive affordability as well as steady, albeit modest, easing in credit standards.

Fitch is projecting single-family starts to expand 11.5% in 2016 and multifamily volume to gain about 4%. Total starts would be roughly 1.2 million (up 8.8%). New home sales should improve about 14.6%, while existing home sales rise 3%. Fitch expects the housing upcycle to continue in 2017, with single-family starts forecast to improve 10% and multifamily volume to grow 5.1%. Total starts would be in excess of 1.3 million (up 8.3%). Fitch also expects new and existing home sales will increase about 11.5% and 4%, respectively.

Home improvement spending is expected to sustain its steady increase during 2016 and into 2017, driven by a modestly growing U. S. economy, a continued recovery in housing and higher home values realized over the past few years. Fitch projects home improvement spending will grow 4.5% in 2016 and 4% in 2017 after increasing an estimated 4.5% in 2015.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for James Hardie include:

--Total U. S. housing starts improve 8.8%, while new and existing home sales grow 14.6% and 3%, respectively, in 2016; Fitch expects the housing upcycle to continue in 2017, with total housing starts forecast to improve 8.3% and new and existing home sales increase 11.5% and 4%, respectively;

--Home improvement spending advances 4.5% during 2016 and 4% in 2017;

--Revenues grow mid-single-digits during FY17;

--Debt to EBITDA settles between 1.5x and 1.7x during FY17 and EBITDA to interest coverage is above 10x;

--James Hardie is FCF neutral during FY17 (assuming no special dividends and includes $91 million of asbestos payments).

RATING SENSITIVITIES

Positive rating actions may be considered in the next 12-18 months if the company continues to adhere to a disciplined growth and capital allocation strategy and the company's strong credit metrics are maintained, including debt to EBITDA consistently below 2x and interest coverage above 10x, and there is no material change in the company's obligations to fund its asbestos liabilities.

Negative rating actions may be considered if there is a sustained erosion of profits and cash flows either due to weak residential construction activity and/or meaningful and continued loss of market share, and the company resumes an aggressive capital allocation strategy, leading to debt to EBITDA consistently above 3x and interest coverage sustained below 7x. Fitch will also review the ratings if there is a meaningful change in its obligations to fund its asbestos liabilities or if new, meaningful claims arise from other jurisdictions.

FULL LIST OF RATINGS

Fitch currently has the following ratings:

James Hardie International Group Limited (JHIGL)

--Long-Term Issuer Default Rating (IDR) 'BBB-'.

James Hardie Building Products Inc. (JHBP)

--Long-Term IDR 'BBB-'.

James Hardie International Finance Limited (JHIFL)

--Long-Term IDR 'BBB-';

--Unsecured revolving credit facility 'BBB-';

--Senior unsecured notes 'BBB-'.

GROUP STRUCTURE

--James Hardie Industries plc (ASX: JHX) is the parent company domiciled in Ireland.

--JHIGL - is a direct subsidiary of the parent company and is a guarantor of the revolving credit facility and the senior unsecured notes.

--JHBP - is an indirect subsidiary of JHIGL and holds most of James Hardie's U. S. manufacturing and sales operations. JHBP is co-borrower under the revolving credit facility and a guarantor of senior unsecured notes.

--JHIFL - is an indirect subsidiary of JHIGL and maintains James Hardie's treasury function. JHIFL is the issuer of the senior unsecured notes and borrower under the revolving credit facility.

The rated entities above have the same IDRs based on the strong degree of linkage between the guarantors and the subsidiary borrower(s), including the downstream guarantees of JHIGL and JHBP.

The senior unsecured notes rank pari passu with James Hardie's revolving credit facility. JHBP, which is a co-borrower under the revolving credit facility, is not a co-issuer on the senior unsecured notes but is a guarantor. The guarantee of the notes is a senior obligation of the guarantors (including JHBP), ranking pari passu in right of payment with all other senior obligations of the guarantors, including obligations under the bank credit facility.