Fitch Ratings has affirmed the Long-Term Issuer Default Ratings of
Fitch has also affirmed the ratings on GT's first lien revolving credit facility and second lien term loan, and GEBV's revolving credit facility, all at 'BB+'/'RR1'; GEBV's senior unsecured notes at 'BB'/'RR2'; and GT's senior unsecured notes at 'BB-'/'RR4'. The Rating Outlook remains Negative.
For GT, Fitch's ratings apply to a
KEY RATING DRIVERS
Post-Acquisition Credit Profile: The affirmation of GT's ratings is driven by Fitch's expectation that the company's credit profile over the intermediate term will fall within Fitch's ratings sensitivities, despite some near-term pressure due to the CTB acquisition and continued external challenges related to the coronavirus pandemic. Supporting GT's ratings is its decision to fund the acquisition with a combination of cash on hand and stock, in addition to some incremental borrowings. This funding plan, along with CTB's somewhat stronger stand-alone credit profile, results in a relatively modest incremental weakening of GT's near-term credit profile (vs. Fitch's stand-alone expectations), with the potential for an incrementally stronger credit profile in a few years once synergies are achieved.
Fitch estimates that GT's pro forma gross EBITDA leverage (according to our calculations) will be in the mid-4.0x range at closing, which the company expects to take place in the latter half of 2021, and will then decline over the subsequent 24 months as market conditions improve and as the attainment of synergies leads to increased EBITDA. The company also plans to use FCF to reduce debt, which will further contribute to leverage reduction. GT estimates that it will achieve about
Negative Rating Outlook: The Negative Rating Outlook incorporates Fitch's concerns that incremental borrowing associated with the acquisition, as well as integration complexities, could complicate GT's ability to strengthen its credit profile while external market conditions remain challenging. GT's FCF is likely to be negative in 2021 as the company replenishes inventories and spends on the capex deferred from 2020.
The Negative Rating Outlook also reflects continued uncertainty with respect to the pace of recovery in the global tire market, following the significant demand decline seen in 2020 as a result of the coronavirus pandemic. Fitch expects global tire demand to rebound significantly in 2021 but to remain below the level seen in 2019, as ongoing shelter-in-place orders in many global regions continue to weigh on vehicle miles traveled. Fitch could downgrade GT's ratings if it appears that the company's credit profile will remain outside of its negative rating sensitivities beyond 2023. On the other hand, Fitch could revise the Rating Outlook to Stable if it appears that the company is on track to improve margins, FCF and leverage.
Acquisition Benefits: The acquisition of CTB will enhance GT's product offerings and potentially drive increased scale in its business. It will increase GT's presence in the mid-tier replacement tire market in
Fitch also believes that CTB has a somewhat stronger credit profile overall than GT, which could ultimately serve to strengthen GT's overall credit profile, although the effect will be limited, given CTB's significantly smaller size than GT. In addition to the cost synergies noted above, GT expects to generate a net present value of at least
Acquisition Risks: Although Fitch expects the CTB acquisition to grow and diversify GT's business, there are also meaningful risks associated with it, as there are with all acquisitions. Merging both companies' operations could lead to potential integration issues or higher-than-expected integration costs. It could also delay the attainment of the expected synergies or reduce the overall synergies derived from the transaction. In addition, the complexity of integrating CTB while GT continues to work on improving its stand-alone credit profile, heightens the risk of a ratings downgrade.
Although pro forma leverage will likely be elevated at acquisition close, both as a result of incremental debt used to fund the transaction and ongoing demand challenges, Fitch expects leverage to run below GT's negative rating sensitivities over the intermediate term. However, following the acquisition, headroom below Fitch's negative rating sensitivities will be reduced, and any unexpected integration problems or other issues that lead to EBITDA leverage running above 4.0x or FFO leverage running above 4.5x for a prolonged period following the acquisition closing could lead to a negative rating action.
Acquisition Overview: GT's acquisition of CTB will create a larger company with tire offerings covering a wide range of price points. GT plans to fund the transaction with a combination of cash and stock, with about 20% of the acquisition price covered by new GT shares. The enterprise value (EV) for the transaction equates to approximately
Elevated Leverage: Fitch expects GT's pro forma gross EBITDA leverage (debt/Fitch-calculated EBITDA) will be elevated, likely in the mid-4.0x range, around the time of close, but Fitch expects it to decline over the intermediate term to below 4.0x as market conditions normalize and GT realizes synergies from the acquisition. FFO leverage is likely to be more elevated in the near term, in part due to lower FFO as a result of about
Negative Near-Term FCF: Fitch expects GT's FCF will likely be negative in 2021 as the company works to replenish its tire inventories, which were depleted in 2020. Also, capex is likely to be elevated as a result of spending deferred from 2020, and Fitch expects there will be some incremental cash costs associated with the CTB acquisition. Following 2021, Fitch expects GT's FCF to turn positive as working capital and capex normalize, and as the company begins to realize synergies from the acquisition. Fitch expects FCF margins to run in the 1% to 3% range in 2022 and beyond.
GEBV Notes Rating: GEBV's
DERIVATION SUMMARY
Following the CTB acquisition, GT will have a relatively strong competitive position as the third largest global tire manufacturer, with a highly recognized brand name and a focus on the higher-margin high-value-added (HVA) tire category. However, the shift in focus has led to lower tire unit volumes and revenue, particularly in the mature North American and Western European markets. The company's diversification is increasing as rising incomes in emerging markets lead to higher demand for HVA tires, particularly in the
GT's margins are roughly consistent with those of the other large Fitch-rated tire manufacturers, Compagnie Generale des
KEY ASSUMPTIONS
Fitch's Key Assumptions within Our Rating Case for the Issuer
GT closes on the CTB transaction 2H21.
About one-half of the
Global auto production rises by 6% in 2021, including an 8% increase in the
Global replacement tire demand largely recovers in 2021 but still remains a little below the 2019 level.
Beyond 2021, GT's sales grow in the low-single digits, excluding the effect of the CTB acquisition.
Capex is elevated in 2021, then runs near 5.5% over the next several years.
Debt (including off-balance sheet factoring) increases to about
FCF is negative in 2021, but then runs in the 1% to 3% range over the following years.
The company maintains a solid liquidity position, including cash and credit facility availability.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Demonstrating continued growth in tire unit volumes, market share and pricing.
Sustained FCF margins of 1.5%.
Sustained gross EBITDA leverage below 3.0x.
Sustained FFO leverage below 3.5x.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Integration issues or unforeseen costs associated with the acquisition that inhibit the company's ability to bring its credit profile inside of its negative rating sensitivities within two years.
A significant step-down in demand for the company's tires without a commensurate decrease in costs.
An unexpected increase in costs, particularly related to raw materials, that cannot be offset with higher pricing.
A decline in the company's consolidated cash below
Sustained break-even FCF margin.
Sustained gross EBITDA leverage above 4.0x.
Sustained FFO leverage above 4.5x.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Fitch expects GT's liquidity to remain sufficient as the company navigates improving economic conditions following the worst of the coronavirus pandemic. As of
According to its criteria, Fitch treats
Debt Structure: GT's consolidated debt structure primarily consists of a mix of secured bank credit facilities and senior unsecured notes. As of
GT also has various borrowings outstanding at certain non-
In addition to its on-balance sheet debt, Fitch treated
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG CONSIDERATIONS
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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