S&P Upgrades Owens Corning (OC) to 'BBB'; Outlook is Stable

• U.S.-based insulation, roofing products, and fiberglass composites manufacturer Owens Corning posted record second quarter earnings and has maintained debt to EBITDA of about 2.5x for the past three quarters, a trend we believe will continue.
• We expect continued gradual improvement in U.S. housing construction and roof replacement will result in continued strong earnings for Owens Corning.
• We are raising our ratings, including the corporate credit rating, on Owens Corning to 'BBB' from 'BBB-'.
• At the same time, we are assigning our 'BBB' issue-level rating to Owens Corning's proposed $400 million 10-year senior unsecured notes.
• The outlook is stable, reflecting our view that Owens Corning will maintain credit measures, including debt to EBITDA of less than 3x and interest coverage of about 7x, consistent with the 'BBB' rating over the next two years.

S&P Global Ratings said it raised its ratings, including the corporate credit rating, on Owens Corning (NYSE: OC) to 'BBB' from 'BBB-'. The outlook is stable.

At the same time, we assigned our 'BBB' issue-level rating to Owens Corning's proposed $400 million 10-year senior unsecured notes. The company will use proceeds of the notes for general corporate purposes, including repayment to exercise the make-whole call to redeem the remainder (approximately $158 million) of its $650 million 6.5% senior notes due Dec. 1, 2016, as well as other outstanding debt under its receivables securitization facility.

"The stable outlook reflects our view that Owens Corning will maintain leverage measures consistent with an intermediate financial risk profile, namely, debt to EBITDA of between 2x and 3x and FFO to debt of over 30%," said S&P Global Ratings credit analyst Thomas Nadramia. "We also expect the company will maintain EBITDA to interest coverage of about 7x."

Given our outlook for improving U.S. construction markets and stable to modestly improving global composites markets, we view a downgrade over the next two year as unlikely. However, a downgrade could occur if a recession (which our economists forecast at a 20%-25% probability) caused a retraction in housing starts and construction activity, such that Owen Corning's EBITDA fell about 30% to about $700 million, resulting in debt to EBITDA sustained above 3x.

We also view an upgrade as unlikely because this would require Owens Corning to maintain leverage ratios in the modest category, i.e., debt leverage of less than 2x.

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