Fitch Affirms Goodyear's IDR at 'B+'; Outlook Revised to Positive
CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'B+' Issuer Default Rating (IDR) and various issue ratings of The Goodyear Tire & Rubber Company (GT) and its subsidiary Goodyear Dunlop Tires Europe B.V. (GDTE). A full list of rating actions follows at the end of this release.
GT's ratings apply to a $2 billion secured revolving credit facility, a $1.2 billion second lien secured term loan and $3 billion in senior unsecured notes. GDTE's ratings apply to a Eur400 million secured revolving credit facility and Eur250 million of senior unsecured notes.
The Rating Outlooks for GT and GDTE have been revised to Positive from Stable.
KEY RATING DRIVERS
GT's ratings reflect the company's strong market position as the third-largest global manufacturer of replacement and original equipment (OE) tires. Although GT's global unit tire sales have declined annually over the past two years, the company's focus on producing higher-margin high value added (HVA) tires and its cost reduction initiatives have helped to grow margins and operating income as revenue has fallen. However, the tire volume decline in 2013 was driven solely by lighter volumes in the first quarter, as GT's global tire volumes rose in each of the last three quarters of 2013. This suggests that GT's volume declines have bottomed and will grow modestly going forward. Free cash flow improved markedly in 2013, although discretionary pension contributions made early in the year kept the overall free cash flow figure negative.
Liquidity remains strong, in part due to the company issuing debt to fund its 2013 discretionary pension contribution. Fitch expects GT's credit protection metrics will improve over the intermediate term as overall tire demand grows, particularly in emerging markets, and the company makes further progress on improving its cost structure. Leverage is likely to trend down over the intermediate term, as earnings rise and as the company was able to fund its 2014 discretionary pension contribution without issuing incremental debt. With the discretionary contributions to its U.S. salaried and hourly pension plans in 2013 and 2014, the funded status of the company's global pension plans has improved dramatically, and it is no longer viewed as a key risk to GT's credit profile.
Rating concerns include growing tire industry capacity, particularly in North America, which could pressure industry pricing over the longer term, and volatility in raw material costs, especially for natural rubber. The tire market environment in Europe remains a concern, although the brightening economic situation in the region may help the market to at least stabilize over the next year. Other concerns include seasonal swings in GT's working capital, and margins that continue to lag several of its key European and Asian competitors. GT's focus on lessening working capital volatility has shown results over the past two years, with the magnitude of the seasonal changes significantly reduced, while cost savings initiatives and a continued focus on pricing will help to narrow its competitive profitability gap.
GT's free cash flow generation has improved markedly over the past two years. Free cash flow in 2013 was ($271) million. However, excluding $834 million in discretionary pension contributions made in early 2013, free cash flow would have been $563 million. This compares to free cash flow of ($118) million in 2012 and ($285) million in 2011. The improvement has largely been driven by GT's HVA tire focus, traction on cost reduction activities and moderating raw material prices. Going forward, Fitch expects GT to continue posting positive free cash flow, excluding pension pre-funding, although volatile raw material prices remain a meaningful risk. Capital spending in 2014 is expected to decline somewhat, to a range of $900 million to $1 billion, while GT's common stock dividend, which the company began paying in the fourth quarter of 2013, will reduce free cash flow by $55 million annually (at the current payout rate), although a partial offset will be the savings of $29 million in annual preferred stock dividends once GT's Series B preferred stock converts to common stock on April 1, 2014.
The funded status of GT's pension plans has improved dramatically following the company's discretionary contributions to its U.S. salaried plan in early 2013 and its U.S. hourly plan in January 2014. GT now estimates that its plans are underfunded by only $700 million, down from $3.5 billion at year end 2012. Based on GT's labor agreement with the United Steelworkers entered into in August 2013, the company can freeze its U.S. hourly pension plan on April 30, 2014. The remaining underfunded pension plans are primarily outside the U.S., with a sizeable portion of the remaining underfunding tied to unfunded plans in certain countries where plans are administered on a pay-as-you-go basis. GT estimates that after contributing $1.3 billion to its pension plans in 2014, cash pension funding will only be $75 million annually in 2015 and 2016.
GT's liquidity position remains relatively strong. At year-end 2013, prior to the early 2014 discretionary pension contribution, GT had $3 billion in cash and cash equivalents and another $1.7 billion available on its primary U.S. and European revolvers. Cash and cash equivalents was well above the $1 billion level that management considers the minimum necessary to meet GT's daily operational requirements through the cycle. Other than $207 million in accounts receivable facility borrowings due in 2015, the company has no significant debt maturities until 2019, although its European and U.S. revolvers mature in 2016 and 2017, respectively. Fitch expects GT to retain a reasonably high level of financial flexibility over the intermediate term, with strong liquidity and positive free cash flow (excluding discretionary pension contributions).
On an EBITDA basis, GT's gross leverage (debt/Fitch-calculated LTM EBITDA) at year-end 2013 was 3.0x, up slightly from 2.8x at year end 2012, as a result of a $900 million senior unsecured note issuance in February 2013 that was used to fund the contributions to its U.S. salaried pension plan. EBITDA improved to $2.1 billion in 2013 from $1.8 billion in 2012 as the EBITDA margin grew to 10.7% from 8.6%. The growth in the EBITDA margin was notable, given that revenue of $19.5 billion in 2013 was down $1.5 billion year-over-year. Over the intermediate term, Fitch expects leverage to trend down on increased earnings and cash flow.
The rating of 'BB+/RR1' on GT's and GDTE's secured credit facilities reflects their substantial collateral coverage and outstanding recovery prospects in the 90% to 100% range in a distressed scenario. The rating of 'B/RR5' on GT's unsecured 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 for the unsecured debt is the result of the substantial amount of higher-priority secured debt in the company's capital structure.
The rating of 'BB/RR2' on GDTE's senior unsecured notes is higher than the rating on GT's unsecured notes due to structural seniority. GDTE's notes are guaranteed on an unsecured basis by GT and GT's subsidiaries that guarantee the parent company's secured credit facility. However, GDTE does not guarantee GT's senior unsecured notes. The recovery prospects of GDTE's senior unsecured notes also benefit from the lower level of secured debt at GDTE. GDTE's credit facility and senior unsecured notes are subject to cross-default provisions relating to GT's material indebtedness.
Positive: Future developments that may, individually or collectively, lead to a positive rating action include:
--Demonstrating positive growth in tire unit volumes, market share and revenue;
--Producing positive annual free cash flow on a sustained basis (adjusted for discretionary pension contributions);
--Generating sustained gross EBITDA margins of 11% or higher;
Maintaining leverage below 3.5x 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;
--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 billion for several quarters;
--A sustained increase in gross EBITDA leverage above 4.0x, particularly to support any shareholder-friendly activities.
Fitch has affirmed the following ratings for GT and GDTE:
--IDR at 'B+'
--Secured bank credit facility at 'BB+/RR1';
--Secured second-lien term loan at 'BB+/RR1';
--Senior unsecured notes at 'B/RR5'.
--IDR at 'B+';
--Secured bank credit facility at 'BB+/RR1';
--Senior unsecured notes at 'BB/RR2'.
The Rating Outlook for both companies is revised to Positive from Stable.
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.
Applicable Criteria and Related Research:
--Corporate Rating Methodology (Aug. 5, 2013);
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (Dec. 23, 2013).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 15, 2011 to Dec. 13, 2012