Fitch Ratings has affirmed Owens Corning's Long-Term Issuer Default Rating (IDR) and senior unsecured debt ratings at 'BBB' and the Rating Outlook remains Stable following the announcement that the company intends to acquire Masonite International Corp. (Masonite) for about $4.0 billion in cash.
Fitch views the transaction as a net positive for Owens Corning's credit profile despite $3.1 billion of additional debt. Fitch expect pro forma EBITDA leverage to increase from 1.3x currently to about 2.3x upon close of the transaction, but remains appropriate for the 'BBB' IDR. Fitch expects EBITDA leverage to decline to around 2.0x by YE 2025 from debt reduction and some cost synergy realization.
While there are integration risks given the size of the transaction, the company's strong balance sheet and ample financial flexibility provide cushion, which is reflected in the Stable Rating Outlook. The transaction is subject to a vote by Masonite shareholders and regulatory approvals, but is expected to close during 1H24. Should the transaction fail to be consummated, Fitch would revisit its ratings based on Owens Corning's legacy business.
Key Rating Drivers
Strong Credit Metrics: Pro forma for the proposed acquisition, Fitch expects Owens Corning's credit metrics to remain strong for its 'BBB' rating, including EBITDA leverage of around 2.3x. Fitch expects leverage to remain around or below this level through 2025. The low leverage provides the company with ample flexibility to integrate the acquisition while navigating a somewhat uncertain demand environment. Fitch expects the company to refrain from meaningful share repurchases or bolt-on acquisitions in 2024 and 2025. However, the 'BBB' rating could be pressured if margins compress meaningfully and management takes a more aggressive stance toward share repurchases, dividends or further debt-funded M&A.
Strategic Rationale: Fitch believes the addition of Masonite brings some strategic value, particularly given the relatively modest enterprise multiple of about 8.9x. The combination increases Owens Corning's overall footprint and Masonite's leading position in the North America doors market enhances the company's position in the building products space. While there is not considerable overlap in the manufacturing processes of doors and Owens Corning's existing product offerings, there could be some ability to leverage supplier and distribution networks for possible sourcing and cross-selling opportunities.
Diversification: Fitch views the acquisition as neutral to the company's end market and geographic diversification. The addition of Masonite slightly increases Owens Corning's exposure to the cyclical U.S. residential new construction market and decreases its exposure to nonresidential and industrial markets, but this is balanced, in part, by modestly higher exposure to residential repair and remodel. The international exposure of the combined company is also expected to diminish by about 5%. While this may be a positive in the near term as Fitch expects growth in North American markets to exceed that of many other regions, Fitch views this as slightly negative in the longer term.
Fitch may revise the positive rating sensitivity for Owens Corning regarding its EBITDA leverage sustained below 2.3x (from 2.0x currently) to reflect the modest risk reduction from increased scale and greater product diversification.
Acquisition Related Risks: There are risks to Owens Corning's credit profile posed by the transaction, including difficulty integrating another large company onto its existing platforms and effectively reducing overhead costs. It is also possible that the company's margins compress more meaningfully than Fitch forecasts, which could pressure credit metrics.
Masonite's Fitch-calculated EBITDA margin of around 15% is below that of Owens Corning and failure to realize meaningful synergies and/or margin degradation from a more difficult operating environment could result in more meaningful margin compression than currently anticipated. However, as it relates to FCF generation, this risk is partially mitigated given the relatively low capital intensity of Masonite's business (~4% of revenue), which should support FCF generation even if there are near-term margin headwinds.
Weaker Demand Environment: Fitch forecasts a weakening operating environment for Owens Corning in the near term. Following an estimated revenue decline of 2% in 2023, Fitch expects organic revenue to decline 3%-4% in 2024 as demand across most of the company's end markets softens, leading to volume declines and flat to lower selling prices. Fitch's rating case forecast assumes organic revenue grows modestly in 2025 as the U.S. residential new construction market continues to improve and repair and remodel activity rebounds.
Modest Margin Compression: Fitch forecasts reported EBITDA margin to decline to 22.0%-22.5% in 2024 and 21.0%-21.5% in 2025, from 23.5%-24.0% in 2023. The margin declines reflect the contribution of Masonite's lower margin operations and Fitch's expectation that record productivity reverts toward historical levels, offset by some realization of cost synergies. Higher and more volatile input costs in a deteriorating demand environment could lead to greater margin compression than Fitch's forecast.
Owens Corning's margins have sustained at historically high levels in recent years, with EBITDA margin of 23%-24% in 2022 and 2023 relative to 18.2% in 2019. Masonite's EBITDA margins also expanded to 15%-16% in recent years, from about 13% in 2019. The margin expansion can be attributed to significant price increases as a result of strong demand in undersupplied markets as well as strong execution by the companies. However, while Fitch expects only modest margin compression through 2025, there is a risk that margins revert back toward historical levels, which could pressure FCF and result in EBITDA leverage approaching the negative sensitivity of 2.8x.
Leading Market Position: Owens Corning's roofing business is the second-largest producer of asphalt roofing shingles in the U.S., the largest producer of residential fiberglass insulation in North America and a leader in technical insulation. Within its composites segment, the company holds the top position in glass nonwovens and the No. 2 position in the global glass fiber market. The addition of Masonite's position as a leading manufacturer of doors in North America further enhances Owens Corning's position in the building products space.
Fitch believes strong market share positions in core markets lead to higher and more stable operating margins over time. Additionally, the diversity of the company's geographic presence, end-market exposure and distribution channels are credit positives relative to more U.S.-centric building products peers that have concentrated exposure to particular end markets or distribution channels.
Strong Financial Flexibility: Owens Corning had $1.3 billion of cash on hand at Sept. 30, 2023 and close to $1.1 billion of combined availability on its revolving credit facility and accounts receivable securitization facility. While the company's liquidity position will diminish as a result of the acquisition, Fitch expects it to remain adequate, in combination with FCF generation, to execute its capital allocation strategy. Fitch expects the company will continue to apply FCF and excess cash toward share repurchases, particularly as its EBITDA leverage remains at the low end of its stated 2.0x-3.0x leverage target and available liquidity greatly exceeds the operating needs of the business.
Consistent FCF Generation: The company demonstrated its ability to generate strong FCF in recent years, with Fitch-estimated FCF margin, after capex and dividends, of 6.8% in 2023, 11.8% in 2022 and 11.2% in 2021. Fitch expects FCF margin will decline to 5%-6% in 2024 as EBITDA margin takes a step back and capex and interest increase. Fitch expects Owens Corning's FCF margin will stabilize around 5.5%-6.5% in the intermediate term, with fluctuations caused by volatile raw material and energy costs.
Derivation Summary
Owens Corning's 'BBB' ratings reflect the company's leading market positions in all of its major businesses, strong brand recognition, and balanced product, end-market and geographic diversification. Risk factors include the cyclicality of the company's end markets, exposure to volatile raw material costs and its at times aggressive capital allocation strategy. Pro forma for the transaction, Owens Corning's leverage of around 2.3x will remain appropriate for its rating. The company's strong profitability and FCF generation position it well to maintain a relatively strong credit profile for its 'BBB' rating, even if the operating environment were to weaken more materially than anticipated.
Owens Corning's credit metrics, including expected pro forma EBITDA leverage of 2.3x, are in line with other low-investment-grade building products peers, including Masco Corporation (BBB/Stable) and James Hardie Building Products, Inc. (BBB-/Stable), and are slightly stronger than Fortune Brands Innovations, Inc. (BBB/Stable). Owens Corning has similar revenue as Masco and Fortune, which are larger than James Hardie. Owens Corning has a higher EBITDA margin and relatively more geographic and end-market diversification than these peers.
Key Assumptions
Total revenue grows 15% in 2024 and 13%-14% in 2025;
Organic revenue declines 2.5%-3.5% in 2024 and grows 1%-3% in 2025;
EBITDA margin declines to 22.0%-22.5% in 2024 and 21%-22% in 2025;
Fitch assumes about $75 million of cost synergies are realized over the next three years;
FCF margin of 5%-6% in 2024 and 2025;
FCF is allocated to modest debt reduction and share repurchases;
EBITDA leverage of 2.3x at YE 2024 and 2.0x at YE 2025;
--(CFO-capex)/net debt of 17%-18% in 2024 and 21%-22% in 2025.
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Fitch's expectation that EBITDA leverage will be consistently at or below 2.0x;
Fitch's expectation that (CFO-capex)/net debt will sustain above 22%;
Management lowers its leverage target while remaining disciplined in its capital allocation strategy.
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fitch's expectation that EBITDA leverage will sustain above 2.8x or EBITDA net leverage will sustain above 2.5x as a result of lower profitability, shareholder-friendly activities or a large debt-financed acquisition;
Fitch's expectation that (CFO-capex)/net debt will sustain below 17%;
Meaningful and continued loss of market share or sustained inflation in raw material costs, leading to EBITDA margin below 15%.
Liquidity and Debt Structure
Strong Liquidity Position: Owens Corning has robust liquidity, with $1.3 billion of cash on hand at Sept. 30, 2023. The company also had $796 million of borrowing availability under its $800 million unsecured revolving credit facility, which matures in July 2026, and $279 million of availability on its $280 million accounts receivable securitization facility maturing in April 2024. Pro forma for the transaction, Fitch expects the company to maintain a cash balance around or above $400 million.
Well-Laddered Maturity Schedule: Owens Corning has a well-spread debt maturity schedule, with most of its debt maturing in 2029 or beyond. Fitch assumes the company will repay its $400 million notes due December 2024 upon their maturity.
Issuer Profile
Owens Corning is a global leader in engineered materials for its roofing, insulation, and fiberglass composites businesses.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
OWENS CORNING 
