CHICAGO--(BUSINESS WIRE)--Fitch Ratings has assigned a rating of 'B/RR5' to The Goodyear Tire and Rubber Company's (GT) proposed $750 million in senior unsecured notes due 2021. GT's Issuer Default Rating is 'B+' and the Rating Outlook is Stable.
The proposed notes will be guaranteed by certain of GT's U.S. and Canadian subsidiaries that also guarantee the company's secured credit agreement and existing senior unsecured notes. If the notes are assigned investment-grade ratings by certain rating agencies, GT can release the guarantees. GT plans to use proceeds from the offering for contributions to its frozen U.S. defined benefit pension plans and for general corporate purposes. The company's U.S. pension plans that are currently frozen were underfunded by about $1 billion as of Dec. 31, 2012.
KEY RATING DRIVERS
GT's ratings reflect the company's strong competitive position as the third-largest global manufacturer of replacement and original equipment (OE) tires. Although unit volumes declined in three of the company's four global regions in 2012, positive pricing and mix partially offset the effect on revenue and margins. Despite posting negative free cash flow, GT has maintained a relatively strong liquidity position, and it has no significant near-term debt maturities. However, Fitch expects only modest improvement in the company's credit metrics over the intermediate term as tire industry conditions remain challenged by weakness in Europe, slower growth in emerging markets and increased competitive manufacturing capacity. The increase in debt from the issuance announced today will also lead to higher leverage, although it will help reduce the company's pension liabilities and volatility tied to discount rates and asset returns.
Concerns include persistently negative free cash flow, heavily underfunded pension plans and upcoming labor negotiations in the U.S. Relatively large swings in working capital throughout the year also are a concern, as the company relies on fourth quarter inflows to support its full-year operating cash flow. Although GT's profitability in North America exceeded its expectations in 2012, the European market has lagged expectations, and upcoming labor negotiations in the U.S. with the United Steelworkers union (USW) introduce a near-term risk of labor actions or increased costs resulting from a new contract that could lower margins in the company's strongest market.
The recovery rating of 'RR5' on the proposed notes reflects Fitch's expectation that recoveries would be below average, in the 10% to 30% range, in a distressed scenario. The relatively low level of expected recovery is due to the substantial amount of higher-priority secured debt in the company's capital structure. Fitch also notes that in a distressed scenario, GT's substantial pension obligations could potentially depress recovery prospects further for the company's unsecured creditors.
Fitch expects global tire market conditions to remain challenging over the intermediate term, which could constrain GT's top line growth potential for several years. In particular, economic weakness in Europe and slower economic growth in several key emerging markets, especially China and India, will pressure demand. Increasing global tire manufacturing capacity will also put pressure on pricing, as will competition from rising Asian tire manufacturers. Longer term, continued growth in the global car parc will drive increased replacement and OE tire demand, while increasingly affluent consumers in emerging markets will increase global demand for premium tires, both of which will support GT's sales.
GT's pension plans remain substantially underfunded, due to a combination of falling discount rates and a history of funding the plans at the statutory minimums. In the U.S., the company's plans were underfunded by $2.7 billion at year-end 2012, which was up from $2.5 billion at year-end 2011. To address the underfunded status, GT announced earlier this month that planned to issue debt to pre-fund its U.S. pension obligations once the plans were frozen. As noted above, Fitch expects proceeds from the proposed issuance will be used to make voluntary contributions to those frozen plans. GT is also working to freeze its non-salaried U.S. pension plans, and if that is completed successfully, it could also issue debt to fund those obligations. Freezing the non-salaried plans could be complicated and will likely be an additional challenge to overcome in the upcoming USW negotiations.
On an EBITDA basis, GT's leverage (debt/Fitch-calculated EBITDA) at the end of 2012 was flat with year-end 2011 at 2.8 times (x) as both debt and EBITDA declined slightly. However, funds from operations (FFO) adjusted leverage rose to 6.1x from 3.9x as FFO (including preferred dividends) declined to $552 million in 2012 from $1.4 billion in 2011. Balance sheet debt was $5.1 billion at Dec. 31, 2012, down from $5.2 billion at Dec. 31, 2011. Liquidity at year-end 2012 was relatively strong, with $2.3 billion in cash and cash equivalents and another $1.8 billion available on the company's primary U.S. and European revolvers. Free cash flow improved in 2012, but it was still negative $118 million, up from negative $285 million in 2011. Fitch expects free cash flow to be pressured again in 2013, but liquidity will remain more than adequate to fund the company's operations over the intermediate term.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--The company producing positive annual free cash flow on a sustained basis;
--An increase in the company's global margin performance;
--A sustained decline in leverage;
--A substantial improvement in the funded status of the company's pension plans.
Negative: Future developments that may, individually or collectively, lead to a negative rating action include:
--A significant decline in demand for the company's tires;
--An unexpected increase in costs, particularly related to raw materials;
--A labor action stemming from the company's USW negotiations;
--A decline in the company's cash liquidity below $1 billion;
--A significant increase in long-term debt, particularly to support shareholder-friendly activities.
Additional information is available at 'www.fitchratings.com'. The issuer did not participate in the rating process other than through the medium of its public disclosure. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--Corporate Rating Methodology (Aug. 8, 2012);
--Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers (Nov. 13, 2012);
--Evaluating Corporate Governance (Dec. 12, 2012);
--Treatment of Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (Dec. 13, 2012);
--2013 Outlook: U.S. Auto Manufacturers and Suppliers (Dec. 17, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
2013 Outlook: U.S. Auto Manufacturers and Suppliers
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers
Evaluating Corporate Governance