Fitch Rates Owens Corning's Proposed $300MM Sr. Notes Offering 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB-' rating to Owens Corning's (NYSE: OC) proposed offering of $300 million principal amount of 10-year senior unsecured notes. The company intends to use the net proceeds of the offering to fund the repurchase of its 9% senior notes due 2019 and 6.5% senior notes due 2016 pursuant to a tender offer for these notes.

The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings for OC reflect the company's leading market position in all of its major businesses, strong brand recognition, and product, end-market and geographic diversity. Risks include the cyclicality of the company's end-markets and relatively weak credit metrics.

The Stable Outlook reflects Fitch's expectation that demand will grow during the remainder of 2014 and into 2015 as the housing market maintains its moderate recovery and commercial construction activity improves from cyclical lows. The ratings and Stable Outlook also incorporate OC's solid liquidity position.

STRONG MARKET POSITION

OC maintains a strong market position in all of its core businesses. According to company estimates, OC's Roofing and Asphalt business is the second-largest producer of asphalt roofing shingles in the United States. The company also indicated that OC is the largest producer of residential, commercial and industrial insulation and the second-largest producer of extruded polystyrene foam insulation. Its Owens Corning PINK FIBERGLAS insulation is a well-recognized brand name. OC's composites segment is also a world leader in the production of glass fiber reinforcement materials

CREDIT METRICS

OC's credit metrics are weak relative to the 'BBB-' rating level. Leverage as measured by Fitch-calculated debt-to-EBITDA was 3x for the LTM period ending Sept. 30, 2014 compared with 2.7x at the end of 2013 and 3.4x at year-end 2012. EBITDA-to-interest was 6.5x for the Sept. 30, 2014 period compared with 6.7x at the end of 2013 and 5.4x at the end of 2012. The rating affirmation takes into account Fitch's expectation that leverage will remain at or below 3x at the end of 2014 and during 2015 and interest coverage will exceed 6x during these periods.

SOLID LIQUIDITY POSITION

As of Sept. 30, 2014, OC had $51 million of cash and about $685 million of borrowing availability under its $800 million revolving credit facility that matures in 2018. Fitch expects OC will have continued access to its revolver as the company has sufficient room within the financial covenants required under the facility.

OC generated negative $100 million of free cash flow (FCF; cash flow from operations less CAPEX and dividends) for the Sept. 30, 2014 LTM period compared with $65 million in 2013, negative $2 million in 2012, and negative $153 million in 2011. In February 2014, the company initiated a quarterly dividend of 16 cents per share. Through the first nine months of the year, OC paid $37 million in dividends.

Fitch projects OC will generate FCF amounting to approximately 1.5%-2.5% of revenues in 2015. Fitch expects management will remain disciplined in prioritizing the use of its cash and FCF by: continuing to invest in its business; finance acquisition opportunities; and prudently return capital to its shareholders. The company has no major debt maturities until 2016, when $400 million of senior notes become due. The proposed notes offering will further extend some of the company's debt maturities.

OC repurchased $44 million of stock under its share repurchase program during the first nine months of 2014 - none during the third quarter of 2014 (3Q'14). As of Sept. 30, 2014, OC had 7.7 million shares remaining under its current authorization. Fitch expects the company will continue with moderate annual share repurchases, financed primarily from FCF. Fitch expects management will refrain from meaningful share repurchases if there is significant deterioration in the company's operating environment.

PRODUCT, GEOGRAPHIC AND END-MARKET DIVERSITY

OC operates in two product groups: Composites (34% of 2013 sales) and Building Materials, which includes its Insulating Systems (30%) and Roofing Products (36%). OC markets its products primarily to the construction industry, with approximately 17% of the company's 2013 net sales directed toward new residential construction, 22% derived from new non-residential construction, 36% from the repair and remodel segment (commercial and residential) and 25% from its international operations. The company's activities in the U.S. are also diversified with manufacturing capacity across the country. This helps mitigate the impact of the regional variability and cyclicality of the markets OC participates in and somewhat lessens the volatility of its overall financial performance.

CYCLICALITY OF END-MARKETS

OC markets its products primarily to the construction industry, including new residential and commercial construction and the repair and remodel segment.

Fitch's housing estimates for 2014 are as follows: Single-family starts are projected to improve 3% to 636,000 and multifamily volume to grow about 17.5% to 361,000. Total 2014 starts should still approximate 1 million. New home sales are forecast to advance about 1.5% to 436,000, while existing home sales volume is expected to decline 6% to 4.785 million, largely due to fewer distressed homes for sale.

Housing activity is likely to ratchet up more sharply in 2015 with the support of a steadily growing economy throughout the year. The unemployment rate should continue to move lower (averaging 5.8% in 2015). Credit standards should steadily ease moderately throughout next year. Demographics should be more of a positive catalyst. More of those younger adults who have been living at home should find jobs and these 25 to 35 year-olds should provide some incremental elevation to the rental and starter home markets. Total housing starts are projected to expand 14% to 1.14 million as single-family starts advance 18% and multifamily volumes gain 7%. New home sales should grow 18%, while existing home sales rise 5%.

Fitch projects home improvement spending will increase 6% in 2014 and grow at a similar pace next year. Spending for discretionary big-ticket remodeling projects should continue to lag the overall growth in the home improvement sector somewhat, as credit availability remains relatively constrained and homeowners remain cautious in their spending. However, there are signs that homeowners are a bit more willing to undertake larger discretionary projects.

The fundamentals of U.S. commercial real estate (CRE) continue to improve at a moderate pace following the recent economic recession. CRE vacancy rates are falling modestly and rents are moderately rising as the economy slowly picks up. Fitch currently expects continued, positive property-level fundamentals across most asset classes and projects private nonresidential construction will grow 8% in 2014 and 6% in 2015.

VOLATILITY OF OC's ROOFING BUSINESS

OC's roofing business has been rather volatile over the past five years. For the first nine months of 2014, sales declined 11% and EBIT margins are 670 basis points (bps) lower compared with the same period last year. During 2013, sales were 2% lower compared with 2012 but EBIT margins increased 320bps year-over-year. Roofing sales fell 7% in 2012 and EBIT margins declined 340bps. OC lowered its earnings guidance in 2012 due in part to a weaker environment for its roofing business and the company also lowered its earnings guidance for 2014 during the second quarter as a result of weaker-than expected roofing volumes.

While roofing demand is primarily driven by re-roof activity (about 75% of demand, on average), new construction (18% of demand) and storm-related activities (about 7% of market demand) have been quite variable during the past 10 years.

The structure of the industry has changed in the past decade, becoming more concentrated, with four competitors accounting for roughly 90% of the asphalt shingle market. This compares with nine major competitors sharing the market during the 1990s. While the industry generally demonstrated pricing discipline during the past five to six years, discounting was evident in 2012 and so far this year as shipments of roofing shingles were weak. Manufacturers may continue to use pricing as a lever to gain market share, as demand remains relatively weak. Nevertheless, OC's consolidated operations have been relatively stable, with reported consolidated EBITDA margins between 10.5% and 14.5% over the past 10 years.

RATING SENSITIVITIES

Future ratings and Outlooks will be influenced by broad economic and construction market trends, as well as company-specific activity, particularly FCF trends and liquidity.

OC's credit metrics are currently weak for the 'BBB-' rating level. Negative rating actions could occur if the recoveries in OC's end-markets dissipates and affects volumes, and/or sustained materials and energy cost pressures contract margins, leading to weaker than expected financial results and credit metrics (including EBITDA margins below 12%, debt to EBITDA consistently above 3.5x and interest coverage beneath 5x for an extended period). Additionally, Fitch may consider a negative rating action if management undertakes a meaningful share repurchase program funded by debt, resulting in consistent debt-to-EBITDA levels above 3.5x.

While Fitch does not currently anticipate a positive rating action in the next 12-18 months, a positive rating action may be considered if the company shows significant improvement in its operating results leading to sustained improvement in credit metrics (particularly debt-to-EBITDA levels below 2x and interest coverage above 7x), and maintains a robust liquidity profile.

Fitch currently rates OC as follows:

--IDR 'BBB-';

--Senior unsecured debt 'BBB-';

--Unsecured revolving credit facility 'BBB-'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=915055

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Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1 312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Curran
Managing Director
+1 212-908-0515
or
Committee Chairperson
Bill Densmore
Senior Director
+1 312-368-3125
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Robert Rulla, CPA
Director
+1 312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Bob Curran
Managing Director
+1 212-908-0515
or
Committee Chairperson
Bill Densmore
Senior Director
+1 312-368-3125
or
Media Relations
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com