CHICAGO - (Business Wire) Fitch Ratings has initiated coverage and assigned a 'BBB-' Issuer Default Rating (IDR) to Owens Corning (NYSE: OC). Fitch has also assigned the following ratings: -- Senior unsecured debt at 'BBB-';
-- Unsecured revolving credit facility at 'BBB-'.
The Rating Outlook is Stable.
The ratings for Owens Corning (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, a weak global economy and volatile raw materials and energy costs. The Stable Outlook reflects the expected moderate improvement in housing metrics as well as home improvement spending in 2010, offset in part by the continued decline in commercial construction spending. The Stable Outlook also incorporates the expectation that OC will continue to generate free cash flow in 2010 and maintain solid liquidity.
OC has lessened its exposure to the U.S. and Canadian construction markets with the 2007 acquisition of Saint-Gobain's reinforcement and composite fabrics businesses and the divestiture of certain non-core operations. However, OC still generates a majority of its revenues from the U.S. and Canadian construction markets, with 32% of 2008 sales (similar percentage in 2006) directed toward residential repair and remodel and 17% (37% in 2006) to new residential construction. Sales to the commercial and industrial sector represented 19% of 2008 sales (vs. 18% in 2006) while its international operations accounted for the remaining 32% of sales (13% in 2006).
In the past, earnings stability in the building materials segment has been driven by end-market diversification - historically, weakness in residential demand has been largely offset by commercial/industrial strength and/or repair and remodel spending. This has not been the case in 2009, wherein most of OC's end-markets are in decline simultaneously although at different stages of correction. Recent statistical and anecdotal information point to a bottom for U.S. housing, though early-stage recovery will be more muted than average. Fitch projects total housing starts to fall 36.7% in 2009 and increase 14% in 2010 to 650,000 homes. During the first 12-15 months from this bottom, the recovery may appear jaw-toothed as substantial foreclosures now in the pipeline present as distressed sales, and as meaningful new foreclosures arise from Alt-A and option adjustable-rate mortgage resets. Home improvement spending is projected to fall by 8.3% in 2009 (the third consecutive year of decline) but is anticipated to improve 3.5% next year. A pick-up in home sales, particularly in existing home sales, combined with a strengthening economy should lead to higher spending on home renovations in 2010. Commercial construction started to weaken earlier in 2009, and the rate of decline is expected to intensify next year. Fitch currently projects private non-residential construction spending (as measured by the Census Bureau) to decline 8.7% in 2009 and 13% in 2010.
OC continues to maintain good credit metrics despite the significant drop in revenues over the past year. Sales for the first nine months of 2009 declined 20% compared to the same period last year and fell 17.2% during the third quarter. OC has improved its cost structure, particularly in its roofing business, enabling the company to report higher margins despite lower revenues. The ratio of debt to earnings before interest, taxes, depreciation and amortization (EBITDA) as calculated by Fitch improved to 3.3 times (x) for the latest-12-months (LTM) from Sept. 30, 2009, compared with 3.6x during fiscal year (FY) 2008. EBITDA to interest remains strong at 5.7x for the Sept. 30, 2009 LTM period compared with 5.0x during FY 2008. Fitch expects these credit metrics to improve slightly next year as sales and margins benefit from increased housing activity and an improved global economy.
OC is exposed to changes in prices of commodities used in its operations (primarily associated with energy), such as natural gas, and raw materials, such as asphalt. In 2008, asphalt prices escalated as crude oil prices soared. In response to the asphalt price escalation, OC and other roofing industry participants increased selling prices to recover inflation in raw materials. The company has been successful in realizing these price increases and prices have remained stable since then despite lower roofing volumes. In 2009, margins in the company's roofing business increased significantly as OC benefited from the higher prices implemented last year and lower input costs so far this year. Additionally, natural gas prices have remained low, providing some positive benefits to margins. OC's policy is to hedge up to 75% of its forecasted natural gas exposures for the next two months, up to 50% of its forecasted exposure for the following four months, and lesser amounts for the remaining periods.
The company has solid liquidity, which gives OC financial flexibility to deal with weak underlying demand expected for its products through the remainder of 2009 and into 2010. OC ended the third quarter of 2009 with $387 million of cash on the balance sheet and $947 million available under its $1 billion revolving credit facility that matures in October 2011. The company should have continued access to the revolver as Fitch expects OC to continue to have sufficient cushion under its financial covenants. During the second quarter of 2009, the company issued $350 million of 9% senior notes to pay down outstandings under the revolving credit facility. OC has no major debt maturities until October 2011, when its $600 million bank term loan facility and revolver mature. Fitch expects the company to address the bank term loan facility maturity and the renewal of its revolver next year. Through the first nine months of 2009, the company generated $269 million of cash from operations ($367 million during the third quarter) and $118 million of free cash flow. Fitch expects the company to continue to generate free cash flow during the remainder of 2009 and in 2010. Fitch also expects OC to preserve its strong liquidity position and refrain from share repurchases through at least 2010.
The company operates in certain concentrated industries with a small number of players having a majority market share. Within the insulation market, it is estimated that the top three manufacturers service approximately 80% of the U.S. fiberglass insulation market. Similarly, four manufacturers control roughly 90% of the U.S. asphalt shingle roofing market.
OC is the largest producer of residential, commercial and industrial insulation in North America, which is sold under well-recognized brand names and trademarks such as Owens Corning PINK FIBERGLAS Insulation. OC sells its insulation products primarily to insulation installers, home centers, lumberyards, retailers and distributors in the U.S. and Canada. Demand for the company's insulating products is driven by U.S. and Canadian new residential construction (35% of year-to-date [YTD] sales), residential repair and remodel activities (22%) and the commercial and industrial sector (27%). International operations accounted for 16% of revenues during the first nine months of 2009. Residential insulation demand lags residential housing starts by approximately three months. Given the 31% decline in housing starts during the third quarter of 2009 and expected weak residential construction activity in the next few quarters, Fitch expects lower sales from the company's insulation business to continue through at least the first half of 2010.
The company is one of the largest U.S. producers of asphalt roofing shingles and industrial, specialty and roofing asphalts. OC sells shingles and roofing accessories primarily through home centers, lumberyards, retailers, distributors and contractors in the United States and sells other products internally to manufacture residential roofing products and externally to other roofing manufacturers. Through the first nine months of the year, U.S. and Canadian residential repair and remodeling accounted for 71% of sales, while new residential construction and commercial and industrial represented 17% and 12%, respectively. Leading up to the fourth quarter of 2008, OC (and the industry) had been raising selling prices to recover inflation in raw material costs, particularly asphalt. Since that time, selling prices have been generally stable, allowing the roofing unit to improve its margins as earlier selling price increases outpaced inflation. Going forward, customers may become more resistant to incremental price increases, especially if energy and raw material cost do not meaningfully inflate further.
OC's glass fiber materials can be found in over 40,000 end-use applications, including sporting goods, computers, telecommunications, boats, aircrafts, defense, automotive, industrial containers and wind energy. Demand for composites is driven by general global economic activity and, more specifically, by the increasing replacement of traditional materials such as aluminum, wood and steel with composites that offer lighter weight, improved strength and less corrosion. International sales represent the largest end-market, accounting for 68% of this segment's YTD sales. The U.S. and Canadian commercial and industrial sectors represented 20% while residential construction made up the remaining 12%. This segment has operated under a very difficult environment since the fourth quarter of 2008, but conditions have improved sequentially since then. During the third quarter, the company reported an operating profit for the first time this year. Fitch expects a slight upward trend in demand as the global economy improves in 2010.
Founded in 1938, OC is a leading global producer of residential and commercial building materials, glass fiber reinforcements and engineered materials for composite systems. The company has 16,500 employees in 30 countries on five continents. OC operates in two general reportable segments: Composites (39% of 2008 sales) and Building Materials, which includes its Insulation Systems (26% of 2008 sales), Roofing (31%), and Other (4%) businesses.
Additional information is available at 'www.fitchratings.com'.
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.
Fitch Ratings
Sandro Scenga, +1-212-908-0278 (New York)
sandro.scenga@fitchratings.com
Robert Rulla, CPA, +1-312-606-2311 (Chicago)
Robert Curran, +1-212-908-0515 (New York)
