Fitch Rates Goodyear's Proposed European Notes 'BB/RR2'

CHICAGO--()--Fitch Ratings has assigned a rating of 'BB/RR2' to Goodyear Dunlop Tires Europe B.V.'s (GDTE) proposed issuance of Eur250 million in senior unsecured notes due 2023 in a private placement. GDTE is a wholly-owned subsidiary of The Goodyear Tire & Rubber Company (GT). The Issuer Default Ratings (IDRs) for GT and GDTE are 'BB-' and the Rating Outlooks are Stable.

The proposed notes will be guaranteed on a senior unsecured basis by GT and its U.S. and Canadian subsidiaries that also guarantee GT's secured credit facilities and senior unsecured notes. Proceeds from the proposed notes will be used to redeem in full GDTE's existing Eur250 million of 6.75% senior unsecured notes due 2019, which became callable on April 15, 2015. By refinancing the 6.75% notes, GDTE will likely be able to take advantage of favorable European credit market conditions to lower its cost of debt, while shifting the maturity four years further into the future.

KEY RATING DRIVERS

The ratings of GT and GDTE reflect the strengthening of the tire manufacturer's credit profile over the past several years as a result of its significantly improved profitability, especially in North America, and the substantial decline in its unfunded pension obligations after fully funding its U.S. plans. GT's focus on high-value-added (HVA) tires and its cost reduction initiatives have resulted in substantial margin growth and increased operating income. Despite somewhat lower sales volumes, GT has retained a strong market position as the third-largest global manufacturer of replacement and original equipment (OE) tires.

Rating concerns include growing tire industry capacity, particularly in North America, and volatile raw material costs, especially for natural rubber and petroleum-based commodities. Conditions in the European tire market also remain a concern, despite some improvement over the past two years. Other concerns include the level of fixed costs in GT's business and the related sensitivity of its financial performance to economic conditions; working capital variability, despite expectations for improvement; and overall profitability that continues to lag several of its key European and Asian competitors. The increase in GT's shareholder-friendly activities over the past two years, including a rising dividend and share repurchases, is also a concern, although Fitch does not expect the company to raise incremental long-term debt to fund these activities.

As of Sept. 30, 2015, GT's debt totaled $6 billion, down from $6.4 billion at year-end 2014. Fitch-calculated EBITDA in the 12 months ended Sept. 30, 2015 was $2.4 billion, leading to Fitch-calculated leverage (debt/Fitch-calculated EBITDA) of 2.4x. Fitch-calculated free cash flow (FCF) in the 12 months ended Sept. 30, 2015 was $903 million, leading to an FCF margin of 5.4%. Fitch expects GT's credit protection metrics will 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 as GT's earnings rise and as it focuses on reducing debt. Fitch also expects reduced variability in the company's quarterly cash flows as it focuses on working capital management.

The 'BB/RR2' rating on the proposed notes as well as GDTE's existing 6.75% senior unsecured notes is higher than the rating on GT's senior unsecured notes due to the GDTE notes' structural seniority. As noted above, GDTE's notes are guaranteed on a senior unsecured basis by GT and its subsidiaries which also guarantee the parent company's secured credit facilities. Although GT's senior unsecured notes are also guaranteed by these same subsidiaries, they are not guaranteed by GDTE. The recovery prospects of GDTE's notes are further strengthened relative to those at GT by the lower level of secured debt at GDTE. Fitch notes that GDTE's credit facility and its senior unsecured notes are subject to cross-default provisions relating to GT's material indebtedness.

KEY ASSUMPTIONS

--Global tire demand grows modestly, but demand remains weak in Latin America.

--Sales in the near term are negatively affected by the strong U.S. dollar, with some improvement after 2015.

--GT's pension contributions decline significantly in 2015 and beyond due to the near fully funded status of its U.S. plans.

--Capital spending running between $1.1 billion and $1.25 billion over the intermediate term, as the company invests in growth initiatives, including its new plant in the Americas.

--Fitch assumes that dividends will rise annually over the next few years.

--The company maintains roughly $2 billion in cash on its balance sheet, with excess cash used for shareholder returns and some debt reduction.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Demonstrating growth in tire unit volumes, market share and revenue;

--Producing FCF margins of 2% or better for an extended period;

--Generating sustained gross EBITDA margins of 12% or higher;

--Maintaining leverage near 2.5x 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 $1.5 billion for several quarters;

--A sustained period of negative free cash flow;

--An increase in gross EBITDA leverage to above 3.5x for a sustained period, particularly as a result of shareholder-friendly activities.

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: Feb. 27, 2015

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

Related Research:

--The Goodyear Tire & Rubber Company - Ratings Navigator (Aug. 14, 2015).

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

Related Research

Goodyear Tire & Rubber Company (The) - Ratings Navigator

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=869879

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Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Philip Zahn, CFA
Senior Director
+1-312-606-2336
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com

Contacts

Fitch Ratings
Primary Analyst
Stephen Brown
Senior Director
+1-312-368-3139
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig D. Fraser
Managing Director
+1-212-908-0310
or
Committee Chairperson
Philip Zahn, CFA
Senior Director
+1-312-606-2336
or
Media Relations
Alyssa Castelli, +1-212-908-0540
alyssa.castelli@fitchratings.com