NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to Owens Corning's (NYSE: OC) proposed offering of $400 million principal amount of 10-year senior unsecured notes. These notes will be ranked on a pari passu basis with all other senior unsecured debt.
The company intends to use the net proceeds for general corporate purposes, including to exercise the make-whole call to redeem its outstanding $158 million 6.5% senior notes due Dec. 1, 2016 and to repay outstanding debt.
The Rating Outlook is Stable. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
OC's ratings 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.
The Stable Outlook reflects Fitch's expectation that overall demand for OC's products will grow modestly during the remainder of 2016 and into 2017 as construction activity in the U.S. maintains its moderate recovery. The ratings and Stable Outlook also incorporate OC's strong credit metrics and solid liquidity position.
STRONG CREDIT METRICS
The company's credit metrics have improved over the past 18 months and are currently strong relative to the 'BBB-' rating level. Leverage as measured by Fitch-calculated debt to EBITDA was 2.2x for the latest-12-months (LTM) period ending June 30, 2016 compared with 2.1x at year-end 2015 and 2.7x at the end of 2014. EBITDA to interest was 9.2x for the June 30, 2016 LTM period compared with 7.8x during 2015 and 6.1x during 2014.
Fitch expects debt to EBITDA will settle between 2.0x - 2.5x and EBITDA to interest coverage will remain above 8.0x at the end of 2016.
LIQUIDITY AND FREE CASH FLOW GENERATION
OC has strong liquidity and is able to meet its financial obligations. As of June 30, 2016, company had $67 million of unrestricted cash and $791 million of borrowing availability under its $800 million unsecured revolving credit facility that matures in 2020. OC also had available capacity of $140 million under its $250 million accounts receivable securitization facility. Fitch expects the company will have continued access to these facilities as OC has sufficient room under the financial covenants required under its credit agreements.
In April 2016, the company entered into a new $300 million term loan (T/L) facility (as allowed under its revolving credit facility) due in November 2020. Proceeds from the T/L, together with borrowings under its securitization facility, were used to fund the acquisition of InterWrap.
Following the planned redemption of its 6.5% notes due December 2016, OC will not have any major debt maturities until 2019, when $143 million of 9% senior notes become due.
OC generated meaningful free cash flow (FCF) during 2015 compared with the 2011-2014 periods. The company reported $271 million of FCF (5.1% of revenues) in 2015 compared with $22 million (0.4% of revenues) in 2014 and $65 million (1.2% of revenues) during 2013. OC generated negative FCF during 2011 and 2012. For the LTM period ending June 30, 2016, the company generated $479 million of FCF (8.7%), driven by higher earnings and improved working capital. Fitch expects OC will generate FCF margins of 5.5% - 7% during the next few years.
DISCIPLINED CAPITAL ALLOCATION STRATEGY
The company is committed to an investment grade rating, and maintaining investment grade financial strength is a pillar of its strategy. OC has a disciplined capital allocation strategy that focuses on investing in attractive organic growth, pursuing value-creating acquisitions, and returning excess cash to shareholders.
OC expects capital spending will be about $385 million during 2016 compared with $393 million in 2015. The company also recently announced plans to invest $110 million in the expansion of its composites operations in India to serve the growing market in this country. This expansion also provides the company with the ability to export to other regions and the flexibility to potentially avoid capital investments in higher cost facilities in the next few years.
In April 2016, the company completed the acquisition of InterWrap, a leading manufacturer of roofing underlayment and packaging materials, for $450 million. This acquisition expands the company's position in roofing components. Fitch expects OC will continue to pursue attractive acquisition opportunities.
In February 2014, the company initiated a quarterly dividend of 16 cents per share. The company increased the quarterly dividend to 17 cents per share in March 2015 and to 18 cents per share in March 2016. For the LTM period ending June 30, 2016, dividend payments totalled $79 million.
OC repurchased $120 million of its stock in 2010, $138 million in 2011, $113 million in 2012, $63 million in 2013, $44 million in 2014 and $138 million in 2015. For the first six months of 2016, the company repurchased $87 million of its stock. At June 30, 2016, OC had 2.8 million shares remaining under its repurchase programs. Fitch expects the company will continue with moderate annual share repurchases, financed primarily with FCF. Share repurchases will likely be moderated depending on the level of investment opportunities (internal growth or acquisition opportunities available to OC) and the macroeconomic outlook.
CYCLICALITY OF THE CONSTRUCTION MARKET
OC markets its products primarily to the construction market. Fitch estimates that approximately 35% of the company's sales were directed to the U.S. and Canada residential repair and remodel segment during 2015, while new residential construction accounted for 17% and commercial and industrial construction contributed 22% of sales. International markets represented about 26% of overall sales.
While the overall construction industry is inherently cyclical, typically, residential construction and commercial construction have differing cycles. Additionally, the repair and remodel sector (both residential and commercial) has generally exhibited less volatile characteristics compared with the new construction market. However, during the last U.S. economic and construction downturn, there were periods when all of these end markets were simultaneously in decline.
In addition, OC's roofing business has been rather volatile over the past five years, as shipments have varied due in part to storm-related activity. During the first half of 2016, revenues in this business segment increased 23.7%, driven primarily by higher volumes. EBIT margins are 10 percentage points higher during the first half of 2016 compared with the same period last year. Management expects shipments will grow low-double digits in 2016, driven by higher storm-related volume. This compares to an estimated 5% growth in shipments during 2015 and a roughly 4% contraction in 2014.
MODEST IMPROVEMENT IN U.S. CONSTRUCTION
Fitch expects overall industry construction spending will expand modestly in 2016, driven primarily by continued robust spending in the private sector. Total housing starts are projected to grow 8.8% while new home sales are forecast to expand 14.6% in 2016. Existing home sales are projected to rise 3% this year. Home improvement spending is also forecast to increase 4.5% while private non-residential construction is expected to improve 7% in 2016.
Fitch expects continued moderate growth in 2017, with total housing starts forecast to increase 8.3%, while new and existing home sales advance 11.5% and 4%, respectively. Home improvement spending is projected to grow 4% and private non-residential construction is expected to improve 6% next year.
Fitch's key assumptions within its rating case for the issuer include:
--U.S. construction spending increases 7%-8% in 2016 and 2017;
--EBITDA margins improve 125 - 175 bps in 2016;
--FCF margin of 5.5% - 7% during the next few years;
--Debt to EBITDA settles between 2.0x-2.5x and EBITDA to interest coverage is above 8.0x during 2016;
--Fitch expects the company to do moderate share repurchases during the remainder of 2016 and during 2017, financed mainly with FCF.
Future ratings and Outlooks will be influenced by broad construction market trends, as well as company specific activity, including FCF trends and uses.
Positive rating actions may be considered if the company shows continuous progress and stability in its overall operating results, leading to sustained improvement in credit metrics (particularly debt to EBITDA levels approaching 2x and interest coverage above 7x and the company's ability to maintain these credit metrics through the cycle), and maintains a robust liquidity profile (at least $500 million with a combination of cash and revolving credit availability).
Negative rating actions could occur if there is a sustained erosion of profits and cash flows either due to weak residential and commercial construction activity, meaningful and continued loss of market share, and/or sustained materials and energy cost pressures resulting in margin contraction, leading to weaker than expected financial results and credit metrics (including EBITDA margins below 12%, debt to EBITDA consistently and meaningfully above 3.0x and interest coverage falling below 5.0x for an extended period).
Additionally, Fitch may consider negative rating actions if the company completes a large debt-financed acquisition or undertakes a meaningful share repurchase program funded by debt, resulting in consistent debt to EBITDA levels meaningfully above 3.0x.
FULL LIST OF RATINGS
Fitch currently rates Owens Corning as follows:
--Issuer Default Rating 'BBB-';
--Senior unsecured debt 'BBB-';
--Unsecured revolving credit facility 'BBB-'.
The Rating Outlook is Stable.
Date of relevant committee: Oct. 28, 2015
Additional information is available on www.fitchratings.com
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)