(The following statement was released by the rating agency)
Oct 11 - Fitch Ratings has affirmed the ratings of Owens Corning
(NYSE: OC), including its Issuer Default Rating (IDR) at 'BBB-' following the company's announcement that it is lowering its earnings guidance for 2012. The Rating Outlook remains Stable. A complete list of ratings follows at the end of this release.
OC recently announced that it is lowering its earnings guidance for 2012 due to a weaker environment for its roofing and composites businesses. As a result, OC's 2012 credit metrics are expected to be weaker relative to Fitch's prior forecast. Fitch currently projects OC's leverage as measured by debt-to-EBITDA will increase to 3.2x at year-end 2012 compared with 2.7x at the end of 2011. Interest coverage is also projected to weaken to approximately 5x for 2012 compared with 7x during 2011. Fitch had previously expected leverage and coverage metrics in 2012 to be consistent with 2011 levels.
While these credit metrics are weak for the rating category, the rating affirmation reflects Fitch's expectation that OC's financial results and credit metrics will improve next year as the housing and commercial construction markets continue their moderate recoveries. Additionally, OC's 2013 profitability should benefit from the restructuring initiatives implemented this year in its composites business. Fitch projects leverage will be below 3x and interest coverage will be above 5.5x at the end of 2013.
The ratings for OC also 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 underlying demand for its products.
The Stable Outlook is supported by the company's healthy liquidity position. OC has $54 million of cash and $426 million available under its $800 million revolving credit facility that matures in July 2016. Fitch's Stable Outlook incorporates the expectation that OC will generate free cash flow (FCF) in 2012 and 2013 and maintain solid liquidity. This gives OC financial flexibility to deal with weak underlying demand expected for its products through the remainder of 2012.
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 improvements in financial results and credit metrics are not achieved next year. Negative rating actions will also be considered if management undertakes a meaningful debt-funded share repurchase program, resulting in consistent debt-to-EBITDA levels above 3.5x.
So far this year, housing metrics have been steadily growing on a year-over-year (yoy) basis. The yoy gains for housing starts and new home sales have been sustaining the momentum of earlier this year. In addition, most months' seasonally adjusted statistics for housing starts, new homes, and existing home sales have also been advancing. However, as Fitch has noted in the past, recovery will likely occur in fits and starts.
Fitch's housing forecasts for 2012 have been raised a few times this year, but still assume a below-trend-line cyclical rise off a very low bottom. In a slowly growing economy with somewhat diminished distressed home sales competition, less competitive rental cost alternatives, and new home inventories at historically low levels, total housing starts should improve about 23.8%, while new home sales increase approximately 19.6% and existing home sales grow 8.5%. For 2013, total housing starts should grow 12.3% while new home sales advance 13.1% and existing home sales improve roughly 4.5%.
Fitch projects home improvement spending to increase 4.5% in 2012 and to grow 4% in 2013. Growth patterns in the intermediate term are likely to be below what the industry experienced during the previous housing boom and the early part of the past decade due to the slower growth in the U.S. economy and only moderately better housing market conditions.
The fundamentals of the U.S. commercial real estate (CRE) market turned positive during second-half 2011, and the improvement has continued in 2012. The increase in demand, coupled with the low levels of new commercial construction in recent years, has fueled strong new commercial construction activity so far this year. Growth in new commercial construction activity will likely moderate during the remainder of 2012 due to the slower growth in the U.S. economy, lingering problems of key European economies, and continued challenges in the CRE capital markets. Fitch currently projects private nonresidential construction will expand 13.1% in 2012 and 5% in 2013.
Fitch expects OC to generate 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.
During the first half of 2012, OC repurchased $82 million of stock under its share repurchase program. As of June 30, 2012, OC had 11.1 million shares remaining under its current authorization. Fitch expects the company will continue with moderate annual share repurchases, financed primarily from FCF. Fitch also expects management to refrain from meaningful share repurchases if there is significant deterioration in the company's operating environment.
Future ratings and Outlooks will be influenced by broad construction market trends, as well as company specific activity, particularly FCF trends and uses.
While Fitch does not currently anticipate a positive rating action in the next 12-18 months, one 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.
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.
Fitch has affirmed the following ratings for OC with a Stable Outlook:
--IDR 'BBB-'; --Senior unsecured debt 'BBB-'; --Unsecured revolving credit facility 'BBB-'.
Additional information is available at '
'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research: --'Corporate Rating Methodology' (Aug. 8, 2012); --'Liquidity Considerations for Corporate Issuers' (June 12, 2007). Applicable Criteria and Related Research: Liquidity Considerations for Corporate Issuers Corporate Rating Methodology (New York Ratings Team)