Fitch Places Goodyear Tire on Rating Watch Negative
Fitch Ratings has placed The Goodyear Tire & Rubber Company (GT) on Rating Watch Negative. Goodyear's debt and recovery ratings (RR) are as follows:
--Issuer Default Rating (IDR) 'B';
--$1.5 billion first lien credit facility 'BB/RR1';
--$1.2 billion second lien term loan 'BB/RR1';
--$300 million third lien term loan 'B/RR4';
--$650 million third lien senior secured notes 'B/RR4';
--Senior Unsecured Debt 'CCC+/RR6'.
Goodyear Dunlop Tires Europe B.V. (GDTE)
--EUR505 million European secured credit facilities 'BB/RR1'.
Fitch's rating action follows Goodyear's $975 million drawdown of its $1.5 billion revolver, indicating that the company is prepared for a possible protracted strike by the United Steel Workers. Including Goodyear's $500 million deposit-funded facility, the revolver is essentially fully drawn. When coupled with Goodyear's existing cash portfolio and modest near-term maturities, the drawdown provides ample liquidity to meet short-term financial and operating requirements. The drawdowns also eliminate any risk that the facilities would not have been available as a result of an extended strike.
The Rating Watch Negative reflects the increasing business risk posed by the strike, which could adversely impact customer and dealer relationships, production efficiency, supply-chain continuity, and financial results. It remains unclear how long and how efficiently Goodyear can run its North American plants with salaried workers, and whether this production, coupled with overseas supply, can meet customer and dealer commitments on a timely and profitable basis. A lengthy strike could cause key OEM customers to add or substitute suppliers, and any supply disruption could result in financial penalties. Volume declines in North America and Europe in the first half of 2006, as well as severe commodity price increases, have contributed to weaker operating results in 2006 despite numerous price increases. Along with higher required pension contributions, these factors could produce negative cash flow in 2006 depending on the actual impact of the strike. Cash drains could accelerate in the event of production difficulties, trade creditor issues or other unforeseen effects of the strike. Recent declines in high commodity prices will benefit Goodyear's material costs, but substantial pension contributions and operating uncertainties will continue to pressure cash flow in 2007. Downward trends in the domestic replacement tire market and lower production levels for domestic could ease supply issues in the short term.
Goodyear's balance sheet remains burdened by high levels of debt that could be exacerbated by potentially negative cash flow in 2006. Financing costs will continue to rise as a result of the most recent drawdowns, and any near-term progress in reducing debt levels will be contingent on meaningful improvement in the company's cost structure and operating performance that could prove to be difficult without a favorable outcome from the strike. Any progress over the near-term is expected to be limited. Goodyear's access to additional capital may be limited, with assets largely pledged to first, second and third-lien secured facilities. High cash levels will also be reduced as a result of debt maturities in 2006 and 2007.
Goodyear's North American Tire segment has suffered from a high cost structure due in part to the company's high labor and legacy costs and a manufacturing footprint that is more concentrated in the U.S. than its competitors. The inability to competitively produce tires in certain segments has led to Goodyear's decision to exit certain low-priced, private label product categories and made the company more dependent on the premium market and new product introductions where the company's recent efforts have been successful. If Goodyear is able to emerge from the strike with a competitive labor contract (which would include further capacity reductions and lower benefit costs), and without hurting its customers, the company will be better positioned to improve its operating results and credit profile. Goodyear has previously targeted cost savings in excess of $1 billion by 2008.
Despite very heavy pension contributions in 2006, Goodyear's underfunded pension position will continue to place a large claim on cash flows over the next several years. Recent U.S. government pension legislation may also reduce the company's flexibility with respect to the timing of required contributions over the intermediate term in the event of weak asset returns. Goodyear's pension funds were underfunded by $3 billion at the end of 2005, and the company anticipates that contributions in 2006 will be near the low end of its estimate of $650 to $875 million.
Other cash requirements include capital expenditures, forecast by Goodyear at $720 million in 2006, of which $269 million had been spent during the first half of the year. Scheduled debt maturities include $215 million of 6 5/8% bonds due in 2006 and $300 million of 8 1/2% bonds due in 2007. Before the start of the strike on Oct. 5, 2006 Goodyear had $1.3 billion cash and equivalents on hand, down from nearly $1.6 billion at June 30, 2006.
Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at http://www.fitchratings.com/recovery.
Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site. The issuer did not participate in the rating process other than through the medium of its public disclosure.
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