TEXT - Fitch rates Owens Corning proposed notes offering
Oct 17 - Fitch Ratings has assigned a 'BBB-' rating to Owens Corning's (NYSE: OC) proposed offering of $600 million principal amount of senior notes due 2022. Net proceeds from this notes offering will be used to fund a tender offer for up to $350 million aggregate principal amount of certain of its outstanding senior notes. The remaining net proceeds will be used to repay outstanding borrowings under the company's revolving credit facility and for general corporate purposes. The Rating Outlook is Stable. A complete list of ratings follows at the end of this release. Concurrent with the notes offering, OC has commenced a tender offer to repurchase up to $250 million of its 6.5% senior notes due 2016 and up to $100 million of its 9% senior notes due 2019. If the company purchases the entire $350 million of outstanding notes in the tender offer, OC expects to incur charges (loss from debt extinguishment) of roughly $65 million during the fourth quarter. While the company's debt levels are expected to increase by about $65 million due to the premium being paid for the tender offer, Fitch views these transactions positively as the company is able to further extend its debt maturities as well as lower its annual interest payments. 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 the currently weak underlying demand for its products. OC's credit metrics are weak for the rating category. 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. Nevertheless, OC's investment grade rating 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 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. The Stable Outlook incorporates Fitch's 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 improvement 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 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, 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. 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 currently rates OC as follows with a Stable Outlook: --IDR 'BBB-'; --Senior unsecured debt 'BBB-'; --Unsecured revolving credit facility 'BBB-'.
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