Fitch Rates Goodyear's Proposed Notes 'BB/RR4'

CHICAGO--(BUSINESS WIRE)-- Fitch Ratings has assigned a rating of 'BB/RR4' to The Goodyear Tire & Rubber Company's (GT) proposed issuance of $900 million in senior unsecured notes due 2026. GT's Issuer Default Rating (IDR) is 'BB', and the Rating Outlook is Stable.

The proposed notes will be guaranteed on a senior unsecured basis by GT's U.S. and Canadian subsidiaries that also guarantee GT's secured credit facilities and its other senior unsecured notes. Proceeds from the proposed notes will be primarily used to redeem in full GT's existing $900 million of 6.5% senior unsecured notes due 2021, which became callable on March 1, 2016. By refinancing the 6.5% notes, GT will likely be able to take advantage of favorable credit market conditions to lower its cost of debt, while shifting the maturity about five years further into the future.

KEY RATING DRIVERS

GT's 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 year, even as global tire volume growth has been in the low-single digit range. 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 to 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 for GT 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 opens next year. Several competitors have opened plants in North America over the past five 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 its capacity is 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 past year, as substantially lower raw material costs have more-than-offset the effect of reduced commodity pass-through charges on the company's revenue. Although commodity prices are likely to rise somewhat over the next several years, Fitch expects them to remain relatively low by historical standards. However, an unexpected sharp increase in the cost of oil or natural rubber could pressure GT's margins. The company has historically been successful in offsetting higher commodity prices with increased tire pricing, but heightened industry competition could limit GT's pricing flexibility in the future.

Fitch generally expects GT's credit protection metrics to 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 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 March 31, 2016, GT's debt totaled $6.1 billion, and last 12 months (LTM) Fitch-calculated EBITDA was $2.5 billion, leading to Fitch-calculated leverage (debt/Fitch-calculated EBITDA) of 2.4x. FFO adjusted leverage was 3.7x, and GT's EBITDA margin was 15.8%. Fitch-calculated free cash flow (FCF) in the LTM ended March 31, 2016 was $444 million, leading to a FCF margin of 2.8%. Liquidity totaled $2.3 billion, including $1.1 billion in cash and $1.2 billion in combined availability on the company's U.S. and European revolvers. In addition to the amounts available on its primary U.S. and European revolvers, GT also had another $803 million available on 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 55% of the company's 2015 revenue was generated in other countries. Also, 77% of the company's consolidated cash, or $831 million, was located at non-guarantor subsidiaries outside the U.S. at March 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 the strong U.S. dollar and low commodity prices, but the effect is less pronounced than in 2015.

--Capital spending runs at about $1.1 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 generally maintains between $1.5 billion and $2 billion in cash, with excess cash used for share repurchases.

--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 2.0x for an extended period;

--Maintaining FFO adjusted leverage near 3.0x 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 3.0x for a sustained period;

--An increase in FFO adjusted leverage to above 4.0x 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.

Date of relevant rating committee: March 11, 2016

Summary of Financial Statement Adjustments - Fitch has made no material adjustments that are not disclosed within the company's public filings.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869362

Additional Disclosures

Solicitation Statushttps://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1004243

Endorsement Policyhttps://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

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View source version on businesswire.com: http://www.businesswire.com/news/home/20160510006260/en/

Fitch Ratings
Primary Analyst:
Stephen Brown, +1-312-368-3139
Senior Director
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst:
Craig D. Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson:
Michael Weaver, +1-312-368-3156
Managing Director
or
Media Relations:
Alyssa Castelli, +1-212-908-0540
New York
[email protected]

Source: Fitch Ratings

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