OREANDA-NEWS. Fitch Ratings has upgraded the Issuer Default Ratings (IDR) of The Goodyear Tire & Rubber Company (GT) and its Goodyear Dunlop Tires Europe B.V. (GDTE) subsidiary to 'BB' from 'BB-'. In addition, Fitch has upgraded GT's senior unsecured notes rating to 'BB/RR4' from 'BB-/RR4'. Fitch has affirmed the ratings on GT's secured revolving credit facility and second-lien term loan, as well as GDTE's secured revolving credit facility at 'BB+/RR1'. Fitch has also affirmed GDTE's senior unsecured notes rating at 'BB/RR2'. A full list of rating actions follows at the end of this release.

GT's ratings apply to a $2 billion asset-based revolving credit facility, a $598 million second-lien term loan and $3 billion in senior unsecured notes. GDTE's ratings apply to a EUR550 million secured revolving credit facility and EUR250 million in senior unsecured notes.

The Rating Outlooks for GT and GDTE are Stable.

KEY RATING DRIVERS

The upgrade of GT's IDR reflects the strengthening of the tire manufacturer's credit profile beyond our previous expectations. This has been the result of significantly improved profitability and strong free cash flow (FCF) generation which the company has used to reduce debt beyond what Fitch had previously contemplated. GT's focus on high value added (HVA) tires and its global cost reduction initiatives have resulted in substantial margin growth and higher operating income, even as global tire volume growth has been in the low-single digit range. GT's market position remains strong as the third-largest global tire manufacturer overall and the top manufacturer of consumer replacement tires in the U.S. Fitch expect credit metrics to strengthen over the intermediate term as the company continues to look for opportunities to use its FCF to strengthen its balance sheet.

Our primary rating concerns remain the heavy competition in the global tire industry, rising industry capacity and the industry's sensitivity to commodity prices, particularly to petroleum products and natural rubber. Fitch expects global Industry capacity will continue to rise, including when GT's new Americas plant currently under construction in Mexico opens next year. Several competitor plants have opened in North America over the past five years, and more capacity has been added in emerging markets. Mitigating this concern is the capacity-intensive nature of HVA tire manufacturing, especially for light truck and SUV HVA tires, which limits the number of HVA tires that can be manufactured with a given amount of capacity. GT has also noted that it is currently capacity constrained on some of its popular tires, and it needs the new Americas plant to meet demand.

Low commodity prices have contributed to GT's strong profit growth over the past year, as substantially lower raw material costs have more-than-offset the effect of reduced commodity pass-through costs on the company's revenue. Although Fitch expects commodity costs to trend upwards over the next several years, we nonetheless expect them to remain relatively low by historical standards. However, an unexpected sharp increase in the cost of oil or natural rubber could pressure GT's margins. The company has generally been successful in the past at offsetting higher commodity prices with increased tire pricing, although heightened industry competition could limit GT's pricing flexibility.

As GT's pension funding obligations have declined, the company has begun targeting a substantial portion of its FCF toward share repurchases. In February 2016, GT's board increased the company's share repurchase authorization by $650 million, bringing the total authorization to $1.1 billion. The company only repurchased $180 million in shares in 2015, and the authorization runs through 2018. As such, Fitch expects GT will balance share repurchases against its other liquidity needs, and we do not expect the company to issue long-term debt to support the repurchase activity. GT also increased its dividend by about 17% in October 2015, although total dividend spending was only $68 million in 2015, and we expect a portion of the dividend increase will be offset by a lower share count.

In October 2015, GT and Sumitomo Rubber Industries, Ltd. (SRI) reached agreement to dissolve their global alliance. As part of the agreement, GT paid $271 million to SRI and issued a $56 million promissory note to Goodyear Dunlop Tires North America, Ltd. (GDTNA). Among the more important aspect of the agreement, GT has taken full ownership of GDTE and Nippon Goodyear Ltd. (NGY), which sells replacement tires in Japan, while SRI has exclusive rights over most of the North American Dunlop business. The addition of the NGY business will lead to a meaningful increase in GT's Asia Pacific tire volumes in 2016, while the loss of much of the North American Dunlop business will lead to a small decline in volumes in the Americas. Overall, the dissolution of the agreement does not have a meaningful impact on GT's credit profile, although putting the disagreement with SRI behind it is a modest credit positive.

At year-end 2015, GT deconsolidated its Venezuelan operation after the company determined that it no longer had sufficient control to continue consolidating it. Going forward, GT will account for its Venezuelan operation under the cost method of accounting. In conjunction with the deconsolidation, GT recorded a $646 million non-cash charge in the fourth quarter of 2015. The deconsolidation is strictly an accounting change, as the company hopes to continue manufacturing and selling tires in Venezuela. GT's Venezuelan business produced $119 million of operating income in 2015, although Fitch expects the rapidly deteriorating economic environment in the country puts future profitability at risk. Fitch views the deconsolidation as neutral to GT's credit profile.

LIQUIIDITY AND FCF

GT's liquidity position remains relatively strong. At year-end 2015, GT had $1.5 billion in cash and cash equivalents and another $1.7 billion available on its primary U.S. and European revolvers. GT's year-end cash balance excluded $320 million in cash at the company's Venezuelan operation. GT's cash balance was down from $2.2 billion at year-end 2014, largely due to the SRI payment, $600 million of term loan prepayments, $180 million of share repurchases, and the deconsolidation of Venezuelan cash, partially offset by $627 million of FCF and $272 million in European note proceeds (see below). Despite the decline in GT's cash balance, it remained comfortably above the $1 billion level that management has traditionally considered the minimum necessary to meet daily operational requirements through the cycle. Although the company has no significant debt maturities until 2019, it does have a total of $364 million in predominantly non-U.S. debt coming due in 2016 (excluding the Euro notes that were redeemed in January.) Also, its U.S. revolver matures in 2017. Going forward, Fitch expects GT to retain a relatively high level of financial flexibility, with adequate cash liquidity backed up with significant revolver capacity and positive annual FCF.

GT's FCF generation has improved markedly over the past several years and is a key contributor to our upgrade of the company's IDR. The company produced $627 million in FCF in 2015, up substantially from ($707) million in 2014. Excluding $907 million in discretionary contributions in 2014, FCF in the previous year would have been $200 million. FCF in 2013 would also have been positive absent discretionary pension contributions. Therefore, adjusted for discretionary pension contributions, GT produced positive FCF for three years in a row, following several years of negative FCF. With its U.S. pension plans substantially funded, and with the company's improved profitability, Fitch expects GT to continue generating positive annual FCF over the intermediate term. GT's FCF still remains quite seasonal, with most of the company's cash generation typically occurring in the fourth quarter, but the magnitude of the positive and negative seasonal working capital swings has declined over the past couple years. Nonetheless, negative working capital at certain points during the year could result in temporary increases in leverage as the company borrows from its revolver to meet short-term cash liquidity needs.

DEBT AND LEVERAGE

On an EBITDA basis, GT's gross leverage (debt/Fitch-calculated latest 12 month [LTM] EBITDA) at year-end 2015 was 2.3x, down from 2.9x at year-end 2014, as debt declined by $638 million to $5.8 billion. Debt at year-end 2015 included EUR250 million in notes that were redeemed in January 2016. Excluding these notes, EBITDA leverage at year-end 2015 would have been 2.2x. EBITDA rose to $2.5 billion in 2015 from $2.2 billion in 2014 as a result of the company's improved profitability, and the company's EBITDA margin rose to a strong 15.3% in 2015 from 12.4% in the previous year. Lease-adjusted leverage (lease-adjusted debt including off-balance sheet factored receivables/Fitch-calculated EBITDAR) declined to 3.1x at year-end 2015, or 3.0x excluding the redeemed Euro notes, down from 3.8x at year-end 2014. Over the intermediate term, Fitch expects leverage to continue trending down toward the 2x range as EBITDA rises and the company looks for further opportunities to reduce debt as part of its plan to strengthen its balance sheet.

Consistent with many U.S. industrial companies with global operations, the majority of GT's debt has been issued in the U.S., but 55% of the company's revenue was generated outside the U.S. in 2015. Also, 71% of the company's consolidated cash, or $1.1 billion, was located at non-guarantor subsidiaries outside the U.S. at year-end 2015, with $424 million at the parent and guarantor subsidiaries. Of the $1.1 billion at non-guarantor subsidiaries, $175 million was at subsidiaries where capital controls can be imposed at times, such as China, South Africa and Argentina. The relatively low level of cash at the parent and guarantor subsidiaries was due, in part, to the $400 million discretionary prepayment on the company's second-lien term loan in December 2015. Fitch views the mismatch between cash and debt as a risk that could lead to higher leverage in the event the company had difficulty repatriating its foreign cash.

PENSIONS

The funded status of GT's pension plans has improved significantly following the discretionary contributions that it made to the U.S. salaried and hourly plans in 2013 and 2014, respectively, that fully funded the plans. GT also de-risked the U.S. plans by shifting the plans' assets to nearly all fixed-income investments, with only 6% of the plan's assets comprised of equities. Both U.S. plans are also frozen. As a result of these actions, we no longer view the U.S. pension plans as a material rating concern. At year-end 2015, the U.S. plans were 94% funded, with an underfunded status of only $327 million. Including the non-U.S. plans, GT's global pensions were 92% funded, with an underfunded status of $642 million. The company estimates that 2016 pension contributions will run between $50 million and $75 million.

RATINGS NOTCHING

The rating of 'BB+/RR1' on GT's and GDTE's secured credit facilities, including the second-lien term loan, reflects their substantial collateral coverage and outstanding recovery prospects in a distressed scenario. The one-notch uplift from the IDRs of GT and GDTE reflects our notching criteria for issuers with IDRs in the 'BB' range. On the other hand, the rating of 'BB/RR4' on GT's senior unsecured notes reflects our expectation that recoveries would be average in a distressed scenario, consistent with most senior unsecured obligations of issuers with an IDR in the 'BB' range.

GDTE's EUR250 million 3.75% senior unsecured notes due 2023 have a recovery rating of 'RR2', reflecting the notes' structural seniority to GT's senior unsecured debt. GDTE's notes are guaranteed on a senior unsecured basis by GT and the subsidiaries that also guarantee GT's secured revolver and second-lien term loan. Although GT's senior unsecured notes are also guaranteed by the same subsidiaries, they are not guaranteed by GDTE. The recovery prospects of GDTE's notes are further strengthened relative to those at GT by the lower level of secured debt at GDTE. However, the rating of 'BB' on GDTE's senior unsecured notes is the same as the rating on GT's senior unsecured notes, reflecting our notching criteria for issuers with an IDR in the 'BB' range. GDTE's credit facility and its senior unsecured notes are subject to cross-default provisions relating to GT's material indebtedness.

KEY ASSUMPTIONS

--Global tire industry demand grows modestly over the intermediate term, but it remains weak in Latin America.
--Near-term revenue is negatively affected by the strong U.S. dollar and low commodity prices, but the effect is less pronounced than in 2015.
--Capital spending runs at about $1.1 billion annually over the intermediate term as the company invests in growth initiatives, including its new Americas plant.
--Dividends remain relatively modest, but they rise over the intermediate term.
--Cash pension contributions run in the $50 million to $75 million range over the intermediate term.
--The company generally maintains between $1.5 billion and $2 billion in cash, with excess cash used for share repurchases.
--The company continues to look for opportunities to reduce debt.

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to a positive rating action include:

--Demonstrating continued growth in tire unit volumes, market share and pricing;
--Maintaining 12-month FCF margins of 4% or better for an extended period;
--Generating sustained gross EBITDA margins of 12% or higher;
--Maintaining leverage near 2.0x for an extended period;
--Maintaining funds from operations (FFO) adjusted leverage near 3.0x 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 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 cash below $1.3 billion for several quarters;
--A decline in 12-month FCF margins to below 2% for a prolonged period;
--An increase in gross EBITDA leverage to above 3.0x for a sustained period;
--An increase in FFO adjusted leverage to above 4.0x for a sustained period.

Fitch has taken the following rating actions on GT and GDTE with a Stable outlook:

GT
--IDR upgraded to 'BB' from 'BB-';
--Secured revolving credit facility affirmed at 'BB+/RR1';
--Secured second-lien term loan affirmed at 'BB+/RR1';
--Senior unsecured notes upgraded to 'BB/RR4' from 'BB-/RR4'.

GDTE
--IDR upgraded to 'BB' from 'BB-';
--Secured revolving credit facility affirmed at 'BB+/RR1';
--Senior unsecured notes affirmed at 'BB/RR2'.