Fitch Rates Whirlpool’s Proposed $500MM Sr. Unsecured Notes Offering ‘BBB’; Outlook Stable
By Business Wire News
By Business Wire News
Fitch Ratings has assigned a ‘BBB’ rating to Whirlpool Corporation’s (NYSE: WHR) proposed offering of $500 million aggregate amount of senior unsecured notes due 2046. The new offering will be equal in right of payment with all other senior unsecured debt. Whirlpool intends to use the proceeds from the notes offering to repay $250 million aggregate principal amount of its 6.5% senior notes maturing in June 2016 and $244 million aggregate principal amount of its 7.75% debentures coming due in July 2016, and if any remain, for general corporate purposes. A complete list of ratings follows at the end of this release.
KEY RATING DRIVERS
WHR’s ratings reflect its position as the world’s largest appliance manufacturer, with leading market positions in many regions. WHR’s global operating platform, increased manufacturing efficiency, and well-recognized skills in innovation have enabled it to improve its cost structure, compete more effectively around the world, and adjust to fluctuations in material costs. Risks include the company’s somewhat aggressive growth strategy, intense global competition, volatility of raw material costs, sensitivity to business cycles, and ongoing regulatory issues.
The Stable Outlook takes into account the company’s solid liquidity position and Fitch’s expectation that credit metrics will improve in the intermediate term as the company continues to integrate the sizeable acquisitions completed during the latter part of 2014.
STABLE CREDIT METRICS
WHR’s credit metrics are appropriate for the rating. Debt to EBITDA for the latest 12 month (LTM) period ending March 31, 2016 was 2.3x, up from 1.9x at the end of 2015 and flat from the year-ago period. Interest coverage remains strong at 12.5x for the March 31, 2016 LTM period compared with 12.1x during calendar 2015. Fitch expects debt to EBITDA will settle between 1.5x-2.0x at the end of 2016 while interest coverage remains above 12.5x.
WHR has solid liquidity with cash of $699 million as of March 31, 2016 and no borrowings under its $2 billion long-term revolving credit facility maturing in September 2019 and its $500 million 364-day revolving credit facility maturing in September 2016. On May 17, 2016, the company entered into an amended long-term credit agreement that provides for $2.5 billion revolving credit facility. The amended facility combines the amounts previously available under WHR’s long-term revolver and 364-day revolving credit facility. The amended $2.5 billion revolver matures in May 2021.
As of March 31, 2016, WHR had $868 million outstanding under its commercial paper program (that is supported by its revolving credit facilities). A majority of the company’s cash is held in foreign countries (approximately 94% of cash as of Dec. 31, 2015 was held overseas). WHR’s intent is to permanently reinvest these funds outside the U.S. and the company’s current plans do not demonstrate the need to repatriate these funds to support U.S. operations.
FREE CASH FLOW (FCF)
The company generated $198 million of free cash flow (FCF; cash flow from operations less capital expenditures and dividends; 0.96% of revenues) for the LTM ending March 31, 2016 compared with $267 million (1.3%) during 2015 and $535 million (2.7%) during 2014. Fitch expects WHR will generate FCF margins of 1.75% to 2.25% during 2016 (including about $200 million of cash outlays for restructuring initiatives) and about 2.5%-3.5% during 2017.
SHARE REPURCHASES AND DIVIDENDS
WHR has been active with share repurchases during the past 12 months, buying back $225 million of its stock during the first quarter of 2016 and $250 million during calendar 2015. In April 2016, the company announced a new share repurchase program of up to $1 billion. Fitch expects the company will execute this new authorization over a multi-year period and it will be funded by FCF.
In April 2016, the company’s board also approved an 11% increase in the quarterly dividend payment to $1.00 per share from $0.90 per share. In April 2015, the company also increased its quarterly dividend payment by 20%. Fitch expects management will remain disciplined in prioritizing the uses of its cash and cash flow.
LEADING MARKET POSITION
WHR is the world’s largest appliance manufacturer with leading market positions in key countries including the U.S., Brazil, the UK, Canada, Russia, Italy, and France. The company also has meaningful market share in other countries such as Mexico, China, India, Germany and Spain.
In 2014, WHR spent almost $2 billion for the acquisitions of Indesit Company SpA (a leading European manufacturer and distributor of major appliances) and a 51% stake in Hefei Rongshida Sanyo Electric Co., Ltd. (a leading manufacturer of home appliances based in Hefei, China).
Management is focused on integrating the Indesit and Hefei acquisitions and realizing planned cost synergies. The company also seeks to use its larger platform to further grow the business, including achieving revenue synergies from the recent acquisitions, growing its core business, improving its emerging market presence, and expanding its adjacent businesses.
REGULATORY ISSUES AND OTHER CONTINGENT LIABILITIES
There are ongoing regulatory issues that could potentially negatively affect the company’s financial profile. WHR’s Brazilian operations have received governmental assessments from Brazil related to claims for income and social contribution taxes associated with the Brazilian government’s export incentive program (BEFIEX) credits monetized by WHR from 2000 to 2002 and 2007 through 2011. The total outstanding tax assessment for income and social contribution taxes related to the BEFIEX credits, including interest and penalties, is approximately 1.6 billion Brazilian reais (equivalent to roughly $443 million as of March 31, 2016). The company is disputing these tax matters in various courts and has not accrued any amounts relating to these assessments.
In 2001, Brazil adopted a law making the profits of controlled foreign corporations of Brazilian entities subject to income and social contribution tax regardless whether the profits were repatriated. WHR’s Brazilian subsidiary, along with other corporations, challenged the constitutionality of the law but the Brazilian Supreme Court ruled on one of the cases in April 2013, finding that the law is constitutional. The case has been remanded to a lower court for consideration of other arguments raised in WHR’s appeal. As of March 31, 2016, the potential exposure for income and social contribution taxes is about 164 Brazilian reais or $46 million. The company is disputing this and has not accrued any amounts related to these assessments.
In September 2015, WHR recognized a liability related to a corrective action affecting certain heritage Indesit products. The company estimates pre-tax cost of the corrective action to be about EUR245 million or roughly $279 million. Approximately 90% of the affected units were manufactured by Indesit prior to the acquisition by WHR in October 2014. The company intends to seek indemnity from the sellers, which could reduce WHR’s net costs.
Individually, these issues are manageable but collectively, they have the potential to result in substantial cash outflows. In particular, the Brazilian tax disputes could increase meaningfully because of interest, penalties and/or changes in exchange rates.
Fitch’s key assumptions within the rating case for Whirlpool include:
–Total U.S. industry housing starts improve 8.8%, while new and existing home sales grow 14.6% and 3%, respectively, in 2016. Fitch expects the housing upcycle to continue in 2017, with total housing starts forecast to improve 8.3% and new and existing home sales increase 11.5% and 4%, respectively;
–U.S. home improvement spending advances 4.5% during 2016 and 4% during 2017;
–Revenues grow low-single digits this during 2016, driven by moderately stronger appliance shipments in the U.S. and relatively weak overall demand internationally;
–EBITDA margins of 10%-11% during 2016 and 2017;
–Debt/EBITDA settles between 1.5x-2.0x at the conclusion of 2016 while interest coverage sustains above 12.5x during the next few years;
–Whirlpool reports FCF margin of 1.75%-2.25% during 2016 (including about $200 million of cash outlays for restructuring initiatives).
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
–Debt reduction and/or EBITDA/funds from operations (FFO) growth, resulting in sustained improvement in credit metrics, including debt to EBITDA consistently situating within a range of 1.0x-1.5x and interest coverage sustaining above 10.0x and the company continues to maintain a healthy liquidity position.
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
–A sustained erosion of profits and cash flows either due to weak global demand, meaningful and continued loss of market share or as the result of long-term inflation in raw material costs, leading to EBITDA margins sustained below 8.5%, debt to EBITDA consistently above 2.5x and interest coverage below 5.5x;
–Whirlpool completes another sizeable acquisition before it fully integrates the Indesit and Hefei acquisitions and meaningfully increases its leverage from current levels;
–Whirlpool undertakes consequential shareholder friendly activities funded by debt, and/or there is a material judgment against the company related to existing regulatory proceedings, leading to leverage levels consistently above 2.5x and interest coverage falling below 5.5x.
FULL LIST OF RATING ACTIONS
Fitch currently has the following ratings:
–Long-Term Issuer Default Rating (IDR) ‘BBB’;
–Short-Term IDR ‘F2’;
–Commercial paper (CP) ‘F2’;
–Senior unsecured notes ‘BBB’;
–Multi-year and 364-day bank revolving credit facilities at ‘BBB’ (Whirlpool Corp., Whirlpool Europe B.V., Whirlpool Finance B.V. and Whirlpool Canada Holding Company as borrowers);
Whirlpool Finance B.V.
–Short-Term IDR ‘F2’;
— CP ‘F2’.
Whirlpool Europe B.V.
Date of Relevant Committee: Nov. 2, 2015.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology – Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Alyssa Castelli, New York
Tel: +1 (212) 908 0540
Robert Rulla, CPA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Robert Curran, Managing Director
William Densmore, Senior Director