Fitch Rates Goodyear's Proposed Notes 'BB-/RR4'
OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BB-/RR4' to The Goodyear Tire & Rubber Company's (GT) proposed issuance of $1 billion in eight-year senior unsecured notes. The Issuer Default Rating (IDR) for GT is 'BB-', and the Rating Outlook is Stable.
The proposed notes will be guaranteed by GT's U.S. and Canadian subsidiaries that also guarantee certain of the company's secured credit facilities and its senior unsecured notes. GT may suspend the guarantees if the notes are rated investment grade by two rating agencies. Proceeds from the proposed notes will be used to redeem GT's $1 billion in 8.25% senior unsecured notes due 2020, which became callable on Aug. 15, 2015. By refinancing the 8.25% notes, GT will likely lower its cost of debt and shift a substantial maturity three years further into the future.
KEY RATING DRIVERS
GT's ratings reflect the strengthening of the tire manufacturer's credit profile over the past several years as a result of its significantly improved profitability, especially in North America, and the substantial decline in its pension obligations after fully funding its U.S. plans. GT's focus on high value added (HVA) tires and its cost reduction initiatives have resulted in substantial margin growth and increased operating income, even as its revenue has declined. Despite lower sales, GT has retained a strong market position as the third-largest global manufacturer of replacement and original equipment (OE) tires.
Rating concerns include growing tire industry capacity, particularly in North America, and volatile raw material costs, especially for natural rubber and petroleum-based commodities. Conditions in the European tire market also remain a concern, despite some improvement over the past two years. Other concerns include the level of fixed costs in GT's business and the related sensitivity of its financial performance to economic conditions; working capital variability, despite expectations for improvement; and overall profitability that continues to lag several of its key European and Asian competitors. The increase in GT's shareholder-friendly activities over the past two years, including a rising dividend and share repurchases, is also a concern, although Fitch does not expect the company to raise incremental long-term debt to fund these activities.
As of Sept. 30, 2015, GT's debt totaled $6 billion, down from $6.4 billion at year-end 2014. Fitch-calculated EBITDA in the 12 months ended Sept. 30, 2015 was $2.4 billion, leading to Fitch-calculated leverage (debt/Fitch-calculated EBITDA) of 2.4x. Fitch-calculated free cash flow (FCF) in the 12 months ended Sept. 30, 2015 was $903 million, leading to a FCF margin of 5.4%. Fitch expects GT's credit protection metrics will strengthen over the intermediate term as overall tire demand grows along with the global car parc, particularly in emerging markets, and as the company continues to work on improving its cost structure. Fitch expects leverage to decline as GT's earnings rise and as it focuses on reducing debt. Fitch also expects reduced variability in the company's quarterly cash flows as it focuses on working capital management.
--Global tire demand grows modestly, but demand remains weak in Latin America.
--Sales in the near term are negatively affected by the strong U.S. dollar, with some improvement after 2015.
--GT's pension contributions decline significantly in 2015 and beyond due to the near fully funded status of its U.S. plans.
--Capital spending running between $1.1 billion and $1.25 billion over the intermediate term, as the company invests in growth initiatives, including its new plant in the Americas.
--Fitch assumes that dividends will rise annually over the next few years.
--The company maintains roughly $2 billion in cash on its balance sheet, with excess cash used for share repurchases.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Demonstrating growth in tire unit volumes, market share and revenue;
--Producing FCF margins of 2% or better for an extended period;
--Generating sustained gross EBITDA margins of 12% or higher;
--Maintaining leverage near 2.5x for an extended period.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significant step-down in demand for the company's tires without a commensurate decrease in costs;
--An unexpected increase in costs, particularly related to raw materials, that cannot be offset with higher pricing;
--A decline in the company's cash below $1.5 billion for several quarters;
--A sustained period of negative free cash flow;
--An increase in gross EBITDA leverage to above 3.5x for a sustained period, particularly as a result of shareholder-friendly activities.
Fitch currently rates GT and its subsidiary Goodyear Dunlop Tires Europe B.V. (GDTE) as follows:
--Secured bank credit facility 'BB+/RR1';
--Secured second-lien term loan 'BB+/RR1';
--Senior unsecured notes 'BB-/RR4';
--Secured bank credit facility 'BB+/RR1';
--Senior unsecured notes 'BB/RR2';
The Rating Outlook for GT and GDTE is Stable.