Fitch Affirms Owens Corning's IDR at 'BBB-'; Outlook Stable
CHICAGO -- October 10, 2013
Fitch Ratings has affirmed the ratings of Owens Corning (NYSE: OC), including
its Issuer Default Rating (IDR), at 'BBB-'. The Rating Outlook is Stable. A
complete list of rating actions 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 end-product and geographic
diversity. Risks include the cyclicality of the company's end-markets and
currently weak credit metrics relative to its rating level.
The Stable Outlook reflects Fitch's expectation that demand will grow during
the remainder of 2013 and into 2014 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
OC's credit metrics are weak relative to the 'BBB-' rating level. Leverage as
measured by Fitch-calculated debt to EBITDA was 3.4x for the latest 12 months
(LTM) ending June 30, 2013 compared with 3.4x at year-end 2012 and 2.5x at the
conclusion of 2011. EBITDA to interest was 5.8x for the June 30, 2013 LTM
period compared with 5.4x during 2012 and 7.1x during 2011.
The rating affirmation takes into account Fitch's expectation that these
credit metrics will improve during the second half of the year and into 2014
as EBITDA increases and debt levels are slightly lowered. Fitch expects debt
to EBITDA will be below 3x at year-end 2013 and under 2.5x at the conclusion
of 2014. Fitch also expects EBITDA to interest will settle at around 5.8x at
the end of 2013 and will be above 6.5x at year-end 2014.
The company's rating and / or Outlook could be lowered if the anticipated
recoveries in OC's end-markets are not sustained and the projected improvement
in financial results and credit metrics are not achieved in the next 6-12
Adjusted EBIT (earnings before interest and taxes, excluding restructuring and
other non-recurring charges) for the first half of 2013 improved relative to
the first half of 2012 despite slightly lower sales levels. Adjusted EBIT for
the first half of 2013 was $201 million or 7.4% of sales compared with $160
million or 5.8% of sales during the first half of 2012.
OC's insulation business reported net sales growth of 22% and 11% for the
second quarter and first half of 2013, respectively, compared to year-ago
levels. Increased volumes and higher selling prices contributed to the strong
revenue growth so far this year. This business had adjusted EBIT of $4 million
or 1% of sales during the second quarter of 2013, the first profitable second
quarter for this business since 2008. Adjusted EBIT margins for the first half
of 2013 were negative 2% but the company expects the insulation business to be
profitable for the full year of 2013.
The company's roofing business also reported improved adjusted EBIT margins on
a YOY basis, increasing by 250 bps during the second quarter despite sales
declining 16%. Adjusted EBIT margins are up 370 basis points (bps) on 6.5%
lower sales during the first half of 2013. The decline in sales was due
primarily to lower volumes, offset in part by higher pricing.
The company's composites segment had sales declines of 5.2% during the second
quarter of 2013 and 4.4% during the first half of the year. The decrease in
sales was due to unfavorable mix and the negative impact of foreign currency
translation. Sales volumes were slightly lower during the second quarter and
were relatively flat for the first half of 2013. Adjusted EBIT margins for the
composites segment were flat on a year-over-year (YOY) basis during the second
quarter and were 140 bps lower during the first half of 2013 compared with the
same period last year.
The company is on track to deliver management's guidance of at least $100
million of adjusted EBIT improvement during 2013 compared with 2012.
SOLID LIQUIDITY POSITION
As of June 30, 2013, OC had $72 million of cash and about $620 million of
borrowing availability under its $800 million revolving credit facility that
matures in 2016. 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 recently amended its $250 million accounts receivable
securitization facility and extended the maturity from 2014 to 2016. As part
of the amendment, the size of the $250 million facility will be lowered each
year to $200 million during the months of November, December and January and
will automatically revert back to $250 million for the remainder of the year.
This is consistent with the seasonality of the company's accounts receivable
Fitch expects OC will generate free cash flow (FCF) amounting to approximately
2.5%-3.5% of revenues in the next two years. 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.
During the first half of 2013, OC did not repurchase any stock under its share
repurchase program, although the company repurchased some stock during the
third quarter of 2013. As of June 30, 2013, OC had 10 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 to refrain from meaningful share repurchases if there is
significant deterioration in the company's operating environment.
CYCLICALITY OF END MARKETS
OC markets its products primarily to the construction industry, with
approximately 15% of the company's 2012 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 27%
from its international operations.
Fitch's housing estimates for 2013 follow: Single-family starts are forecast
to grow 16.8% to 625,000, while multifamily starts expand about 19.9% to
295,000; single-family new home sales should increase approximately 19.6% to
439,000 as existing home sales advance 8.5% to 5.06 million. Total housing
starts are projected to expand 16.5% in 2014 to 1.07 million as single-family
starts advance 20% and multi-family starts gain 9.2%. New home sales should
improve 20% while existing home growth should moderate in volume to 5%.
Fitch projects home-improvement spending will increase 4% in 2013 and 5% in
2014. Growth patterns in the intermediate term are likely to be below what the
industry experienced during the 1999 - 2006 periods due to slower growth in
the U.S. economy and only moderately improved housing market conditions.
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
advances. Fitch currently expects continued, positive property-level
fundamentals across most asset classes. Fitch expects new construction
activity to remain positive during the remainder of the year and into 2014
despite weak growth in the U.S. economy, lingering problems of key European
economies, and continued challenges in the CRE capital markets. Fitch projects
private nonresidential construction will grow 2% in 2013 and 5% in 2014.
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 weak relative to the 'BBB-' rating level. Negative
rating actions could occur if the anticipated recoveries in OC's end-markets
are not sustained, leading to weaker than expected credit metrics.
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 and interest coverage below 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 a more robust liquidity profile.
Fitch has affirmed the following ratings for OC with a Stable Outlook:
--IDR at 'BBB-';
--Senior unsecured debt at 'BBB-';
--Unsecured revolving credit facility at 'BBB-'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology: Including Short-Term Ratings and Parent and
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Robert Rulla, CPA, +1 312-606-2311
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Bob Curran, +1 212-908-0515
Craig Fraser, +1 212-908-0310
Brian Bertsch, +1 212-908-0549
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