GT's ratings apply to a
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
GT's free cash flow generation has improved markedly over the past two years. Free cash flow in 2013 was
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
GT's liquidity position remains relatively strong. At year-end 2013, prior to the early 2014 discretionary pension contribution, GT had
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
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
--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.
--Corporate Rating Methodology (
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis (
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective
Source: Fitch Ratings
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