February 23, 2017 / 5:43 PM / 6 months ago

Fitch: Goodyear's Second-Lien Term Loan Repriced; No Rating Effect

(The following statement was released by the rating agency) CHICAGO, February 23 (Fitch) Fitch Ratings does not expect the planned repricing of The Goodyear Tire & Rubber Company's (GT) second-lien term loan to affect the ratings of the company or the loan. GT's Issuer Default Rating (IDR) is 'BB' and the Rating Outlook is Stable. Fitch rates the second-lien term loan 'BB+/RR1'. The second-lien loan was launched in 2005 with $1.2 billion outstanding. Subsequent payments reduced the amount outstanding to $399 million at Dec. 31, 2016. The second-lien loan is guaranteed by most of GT's U.S. and Canadian subsidiaries, and it is secured by a second-priority interest in the same collateral securing GT's $2 billion first-lien revolving credit facility. The second-lien loan matures in April 2019. The rating of 'BB+/RR1' on the second-lien loan reflects its substantial collateral coverage and outstanding recovery prospects in the 90% to 100% range in a distressed scenario. The one-notch uplift from GT's IDRs reflects Fitch's criteria for notching when an issuer has an IDR in the 'BB' range. KEY RATING DRIVERS GT ratings reflect the tire manufacturer's strengthened credit profile, which has been driven by significantly improved profitability and free cash flow (FCF) that the company has used to reduce debt. GT's focus on high value added (HVA) tires and its global cost reduction initiatives have resulted in substantial margin growth and higher operating income over the past couple of years, even as global tire volume growth has been sluggish. GT's market position remains strong as the third-largest global tire manufacturer overall and the top manufacturer of consumer replacement tires in the U.S. Fitch expects credit metrics could strengthen over the intermediate term as the company continues to look for further opportunities to use FCF to strengthen its balance sheet. Fitch's primary rating concerns remain the heavy competition in the global tire industry, rising industry capacity and the industry's sensitivity to commodity prices, particularly to petroleum products and natural rubber. Fitch expects global industry capacity will continue to grow, including when GT's new Americas plant begins production in 2017. Several competitors have opened plants in North America over the past six years and more capacity has been added in emerging markets. Mitigating this concern is the capacity-intensive nature of HVA tire manufacturing, especially for light truck and SUV HVA tires, which limits the number of HVA tires that can be manufactured with a given amount of capacity. GT has also noted that it is capacity constrained on some of its popular tires, and it needs the new Americas plant to meet demand. Low commodity prices have contributed to GT's strong profit growth over the two years, as substantially lower raw material costs have more than offset the effect of reduced commodity pass-through charges on the company's revenue. Commodity prices are expected to rise over the near term, which will create some margin headwinds. The company has historically been successful in offsetting higher commodity prices with increased tire pricing, but heightened industry competition could limit GT's future pricing flexibility. Fitch generally expects GT's credit protection metrics to strengthen over the intermediate term as global tire demand grows along with the number of vehicles on global roads, especially in emerging markets, and as the company continues to work on improving its cost structure. Fitch expects leverage to decline over the intermediate term as GT's earnings rise and as it continues to reduce debt. Fitch also expects reduced variability in the company's quarterly cash flows over time as it focuses on working capital management. As of Dec. 31, 2016, GT's debt totaled $5.8 billion, including $502 million in off-balance-sheet securitized receivables, and last 12 months (LTM) Fitch-calculated EBITDA was $2.5 billion, leading to Fitch-calculated EBITDA leverage of 2.3x. FFO adjusted leverage was 3.7x, and GT's EBITDA margin was 16.5%. Fitch-calculated free cash flow (FCF) in the year ended Dec. 31, 2016 was $212 million, leading to a FCF margin of 1.4%. Liquidity totaled $4.1 billion, including $1.1 billion in cash and $3 billion in combined availability on the company's U.S. and European revolvers, as well as various foreign and domestic facilities. Consistent with many U.S. industrials with global operations, the majority of GT's debt has been issued in the U.S., but 56% of the company's 2016 revenue was generated in other countries. Also, 79% of the company's consolidated cash, or $889 million, was located at non-guarantor subsidiaries outside the U.S. at Dec. 31, 2016. Fitch views the mismatch between cash and debt as a risk that could lead to higher leverage if the company has difficulty repatriating its foreign cash. KEY ASSUMPTIONS --Global tire industry demand grows modestly over the intermediate term, but it remains weak in Latin America. --Near-term revenue is negatively affected by a strong U.S. dollar. --Capital spending runs at about $1 billion annually over the intermediate term as the company invests in growth initiatives, including its new Americas plant. --Dividends remain relatively modest, but they rise over the intermediate term. --Cash pension contributions run in the $50 million to $75 million range over the intermediate term. --The company continues to look for opportunities to reduce debt. RATING SENSITIVITIES Positive: Future developments that may, individually or collectively, lead to a positive rating action include: --Demonstrating continued growth in tire unit volumes, market share and pricing; --Maintaining 12-month FCF margins of 4% or better for an extended period; --Generating sustained gross EBITDA margins of 12% or higher; --Maintaining leverage near 2x for an extended period; --Maintaining FFO adjusted leverage near 3x 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 $1.3 billion for several quarters; --A decline in 12-month FCF margins to below 2% for a prolonged period; --An increase in gross EBITDA leverage to above 3x for a sustained period; --An increase in FFO adjusted leverage to above 4x for a sustained period. Fitch rates GT and its Goodyear Dunlop Tires Europe B.V. (GDTE) subsidiary as follows: GT --IDR 'BB'; --Secured bank credit facility 'BB+/RR1'; --Secured second-lien term loan 'BB+/RR1'; --Senior unsecured notes 'BB/RR4'. GDTE --IDR 'BB'; --Secured bank credit facility 'BB+/RR1'; --Senior unsecured notes 'BB/RR2'. The Rating Outlook for GT and GDTE is Stable. Contact: Primary Analyst Stephen Brown Senior Director +1-312-368-3139 Fitch Ratings, Inc. 70 West Madison Street Chicago, IL 60602 Secondary Analyst Craig D. Fraser Managing Director +1-212-908-0310 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Date of relevant rating committee: March 11, 2016 Summary of Financial Statement Adjustments - Per its criteria, Fitch has adjusted GT's debt and FCF calculations for the effect of off-balance-sheet receivables securitizations. Additional information is available at 'www.fitchratings.com'. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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