Reuters logo
Fitch: Goodyear's Second-Lien Term Loan Repriced; No Rating Effect
February 23, 2017 / 5:43 PM / 10 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: 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 ''. 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001

Our Standards:The Thomson Reuters Trust Principles.
0 : 0
  • narrow-browser-and-phone
  • medium-browser-and-portrait-tablet
  • landscape-tablet
  • medium-wide-browser
  • wide-browser-and-larger
  • medium-browser-and-landscape-tablet
  • medium-wide-browser-and-larger
  • above-phone
  • portrait-tablet-and-above
  • above-portrait-tablet
  • landscape-tablet-and-above
  • landscape-tablet-and-medium-wide-browser
  • portrait-tablet-and-below
  • landscape-tablet-and-below