OREANDA-NEWS.  Fitch Ratings has published the following ratings for James Hardie:

James Hardie International Group Limited
--Long-term Issuer Default Rating (IDR) 'BBB-'.

James Hardie Building Products Inc.
--Long-term IDR 'BBB-'.

James Hardie International Finance Limited (JHIFL)
--Long-term IDR of 'BBB-';
--Unsecured bilateral credit facilities 'BBB-'.

Fitch has also assigned an expected senior unsecured rating of 'BBB-' to JHIFL's proposed offering of \$325 million senior unsecured notes. Proceeds from the notes offering will be used to repay borrowings under James Hardie's bilateral credit facilities and for general corporate purposes.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings reflect James Hardie's dominant position within the fibre cement industry, relatively diversified geographic and end-market diversity, and somewhat conservative financial strategy. Risks include the cyclicality of James Hardie's end markets, the company's aggressive growth strategy, meaningful shareholder friendly cash outflows, some customer concentration and exposure to asbestos liabilities. The Stable Outlook reflects Fitch's expectations that James Hardie's end-markets within the U.S. will continue to improve during 2015.

LEADERSHIP POSITION

James Hardie is a world leader in manufacturing fibre cement siding and backerboard. Based on net sales, James Hardie 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 estimates that it has approximately 90% market share in the fibre cement exterior siding segment. However, James Hardie competes with alternative siding products, including vinyl and wood siding as well as bricks and stucco. Based on U.S. Census data, fibre cement siding accounted for about 16% of the overall exterior siding industry for newly built homes completed during calendar year 2013, up from 9% in 2005. James Hardie estimates that it had a roughly 16% market share of the U.S. exterior siding sector during FY'14.

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.

GEOGRAPHIC AND END-MARKET DIVERSITY

The sale of fibre cement products in the U.S. accounted for 73%, 70% and 67% of James Hardie's worldwide net sales for fiscal years (FYs) 2014 (ending March 31), 2013 and 2012, respectively. James Hardie's activities in the U.S. are diversified with manufacturing capacity spread across the country. During FY'14, management estimates that 55% of its U.S. siding volumes were directed to the repair and remodel segment, with the remaining 45% to the new construction market. Additionally, exterior products accounted for about 75% of sales while interior products represented roughly 25%.

James Hardie has some customer concentration, with two major customers individually accounting for over 10% of net sales in one or all of the past three FYs. During FY'14, the largest customer accounted for 11.3% of sales while the second largest customer contributed 9.3% of net sales.

EXPECTED CONTINUED IMPROVEMENT IN U.S. END-MARKETS

James Hardie markets its products primarily to the U.S. residential construction industry. Fitch projects single-family starts will improve 18% while multifamily volume grows 7% during 2015. Total starts should be in excess of 1.1 million this year. Fitch forecasts new home sales will advance about 18% while existing home sales is expected to increase 5% during 2015.

Fitch projects home improvement spending will increase 6% in 2015. The continued improvement in the housing market, as well as strong home price appreciation seen in 2013 and more moderate but steady price inflation in 2014, is likely to drive higher spending on home renovation projects in 2015.

Fitch projects spending for discretionary big ticket remodeling projects will continue to lag the overall growth in the home improvement sector somewhat. This is primarily because credit availability remains relatively constrained and homeowners remain cautious in their spending. However, there are signs homeowners are becoming somewhat more willing to undertake larger discretionary projects.

AGGRESSIVE GROWTH STRATEGY

James Hardie continues to execute its 35/90 strategy, which aims to, over the long term, increase fibre cement's share of the total U.S. sidings market to approximately 35% (from 16% currently) and to maintain James Hardie's roughly 90% share of fibre cement sales.

James Hardie is undertaking an aggressive capacity expansion plan, including the start-up of an idled plant, the addition of lines in three existing facilities, as well as a potential greenfield project. James Hardie expects to spend, on average, approximately \$200 million annually on capex for the next three fiscal years. James Hardie expects to increase capex from \$115 million in FY'14 to about \$300 million in FY'15. The capacity expansions are based on management's market growth expectations as well as its strategy to capture a larger share of the overall residential exterior siding market.

Fitch is somewhat concerned that James Hardie is expanding its capacity while its utilization rates in the U.S. remain relatively low. Management estimates that capacity utilization rates averaged 58% in the U.S. during FY'14, which includes the planned capacity additions as well as mothballed capacity. In the Asia Pacific region, management estimates its capacity utilization rate averaged 76% during FY'14.

While Fitch continues to expect housing improvement this year, there is some risk that the multi-year housing recovery stalls, leaving James Hardie with excess capacity while demand slows or deteriorates. This is somewhat mitigated by James Hardie's exposure to the repair and remodel segment, which has shown less volatility compared with the new home construction market. It is also important to note that the capacity expansions are more weighted towards specialty products that provide James Hardie with greater differentiation.

Fitch expects James Hardie will curtail, delay or slow down its capacity expansion plans if demand is meaningfully lower than management's expectations.

SHAREHOLDER FRIENDLY ACTIVITIES

James Hardie seeks to provide consistent ordinary dividend payments to its shareholders and make meaningful special dividends and/or share repurchases.

James Hardie did not pay ordinary dividends in FY'10 and FY'11 amidst the U.S. housing downturn and paid \$17.4 million in FY'12, \$188.5 million in FY'13 and \$93 million in FY'14. James Hardie paid ordinary dividends of \$89 million during 2Q'15. James Hardie seeks to distribute between 50%-70% of its earnings (net profit after taxes) in the form of ordinary dividends.

James Hardie paid special dividends totaling \$106.1 million during FY'14. James Hardie paid \$267 million of special dividends during the first half of 2015 (1H'15), including a \$124.6 million 125-year anniversary special dividend that was paid in May 2014 and a \$142.4 million special dividend paid in August 2014.

In May 2013, James Hardie announced a share buyback program to acquire up to 5% of its issued capital through May 2014. During FY'14, James Hardie repurchased 1.89 million shares of its common stock for \$22.1 million. Subsequent to its March 31, 2014 year-end, James Hardie acquired an additional 715,000 shares for \$9.1 million. In May 2014, James Hardie announced a new share buyback program to acquire up to 5% of its issued capital. James Hardie has not repurchased shares under the May 2014 buyback program.

Fitch expects James Hardie will continue to make special dividends and/or repurchase stock. However, the total spent on these activities in FY'16 and FY'17 could be meaningfully lower than the amount spent so far during FY'15. The rating reflects Fitch's expectation that James Hardie will remain disciplined in its capital allocation strategy and strictly adhere to its leverage target of 1.0x-2.0x.

LIQUIDITY AND FREE CASH FLOW

As of Sept. 30, 2014, James Hardie had cash of \$60.5 million and \$125 million of borrowing availability under its bank credit facilities (totalling \$505 million with maturities ranging from March 2016 to May 2019). Subsequent to the end of the September quarter, the company terminated a \$40 million bilateral credit facility maturing in April 2016 and replaced it with a new \$125 million bilateral credit facility maturing in November 2017, increasing the total amount of the bilateral credit facilities to \$590 million. Fitch believes that James Hardie will continue to have access to these facilities as it has sufficient room under the financial covenants of these credit facilities. The proposed notes issuance will repay borrowings under the credit facilities, which would enhance James Hardie's liquidity position.

James Hardie generated \$8 million of free cash flow (FCF) during FY'14 and negative \$440.3 million of FCF for the latest 12 month (LTM) period ending Sept. 30, 2014. (FCF is cash flow from operations less CAPEX and dividends.) Fitch projects James Hardie will have negative FCF during FY'15, due to higher CAPEX as well as ordinary and special dividends and asbestos payments paid during the first half of FY'15.

The negative FCF projected for FY'15 will be funded by the issuance of debt, which is consistent with James Hardie's strategy to add leverage to the balance sheet. James Hardie had no debt outstanding during FY'12-FY'14.

CREDIT METRICS

Leverage as measured by Fitch-calculated debt to EBITDA was 1.7x and funds from operations (FFO) adjusted leverage was 2.6x for the Sept. 30, 2014 LTM period. With James Hardie incurring debt to support its capacity expansion plans and dividend payments, Fitch expects debt to EBITDA will be 1.7x at the end of FY'15 and increase to 1.9x at the conclusion FY'16. 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 2.6x at the end of FY'15 and 2.8x at the conclusion of FY'16.

Coverage ratios are projected to remain strong, with EBITDA to interest coverage of 37.0x for FY'15 and 14.0x for FY'16. FFO interest coverage is forecast to be 29.0x and 11.0x for FY'15 and FY'16, respectively.

ASBESTOS LIABILITY

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, James Hardie entered into an Amended and Restated Final Funding Agreement (AFFA) with the Australian government related to these asbestos claims. The AFFA requires James Hardie to contribute up to 35% of its annual FCF (defined as operating cash flow) to the Asbestos Injuries Compensation Fund (AICF).

The AICF was formed to implement and administer the agreement (AFFA) between James Hardie and the Australian government. This commitment extends to 2045, with recurring automatic 10 year extension periods, unless the parties agree to a final payment. Between fiscal years 2007 and 2014, James Hardie has contributed A\$721 million to the AICF, including A\$119.9 million (\$113 million) paid on July 1, 2014.

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 Sept. 30, 2014, James Hardie reported asbestos liabilities of \$1.56 billion.

The asbestos liability is based on the actuarial estimate of future asbestos related cash flows as prepared on an annual basis by KPMG Australia. If the AICF does not have sufficient funds to pay all claims as provided for in the AFFA, it may either have to borrow funds under an existing stand-by facility provided by the New South Wales Government and/or consider rationing the payment of claims.

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 accounting for the liability and the cash outflow best represents the risk associated with this contingent liability.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad economic and construction market trends, as well as company-specific activity, particularly free cash flow trends and liquidity.

Positive rating actions are unlikely in the next 12-18 months as Fitch monitors James Hardie's capital allocation strategy and its adherence to its leverage target of 1.0x-2.0x net debt to EBITDA. However, Fitch may consider taking positive rating actions in the intermediate term if James Hardie's financial performance remains in line with Fitch's expectations (including debt to EBITDA consistently below 2x and interest coverage above 10x) and there is no material change in James Hardie's obligations to fund its asbestos liabilities.

On the other hand, Fitch may take negative rating actions if James Hardie's financial performance is in line with Fitch's downcase forecast (including revenue declines similar to FY'08-FY'10), EBITDA margins in the low teens, and James Hardie continues with its aggressive capital allocation strategy, which would lead to leverage levels consistently above 3x and interest coverage 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.

GROUP STRUCTURE

--James Hardie Industries plc (ASX: JHX) is the parent company domiciled in Ireland.
--James Hardie International Group Limited (JHIGL) -'BBB-' IDR - is a direct subsidiary of the parent company and is a guarantor of the bilateral credit facilities and the proposed \$325 million senior unsecured notes issuance.
--James Hardie Building Products Inc. (JHBP) -'BBB-' IDR - 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 bilateral credit facilities and a guarantor of the proposed \$325 million senior unsecured notes issuance.
--James Hardie International Finance Limited (JHIFL) -'BBB-' IDR - is an indirect subsidiary of JHIGL and maintains James Hardie's treasury function. JHIFL is the issuer of the proposed \$325 million senior unsecured notes issuance and borrower under the bilateral credit facilities.

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 proposed notes issuance will be ranked pari passu with James Hardie's existing bilateral bank credit agreements. JHBP, which is a co-borrower under the existing bilateral bank revolving credit facilities, will not be a co-issuer of the proposed senior unsecured notes but will be a guarantor. The guarantee of the notes will be 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 existing bi-lateral bank credit agreements.