(The following statement was released by the rating agency)
Feb 20 - CHICAGO Fitch Ratings has assigned a rating of 'B/RR5' to
The Goodyear Tire and Rubber Company's (GT) proposed $750 million in senior
unsecured notes due 2021. GT's Issuer Default Rating is 'B+' and the Rating
Outlook is Stable.
The proposed notes will be guaranteed by certain of GT's U.S. and Canadian
subsidiaries that also guarantee the company's secured credit agreement and
existing senior unsecured notes. If the notes are assigned investment-grade
ratings by certain rating agencies, GT can release the guarantees. GT plans to
use proceeds from the offering for contributions to its frozen U.S. defined
benefit pension plans and for general corporate purposes. The company's U.S.
pension plans that are currently frozen were underfunded by about $1 billion as
of Dec. 31, 2012.
KEY RATING DRIVERS
GT's ratings reflect the company's strong competitive position as the
third-largest global manufacturer of replacement and original equipment (OE)
tires. Although unit volumes declined in three of the company's four global
regions in 2012, positive pricing and mix partially offset the effect on revenue
and margins. Despite posting negative free cash flow, GT has maintained a
relatively strong liquidity position, and it has no significant near-term debt
maturities. However, Fitch expects only modest improvement in the company's
credit metrics over the intermediate term as tire industry conditions remain
challenged by weakness in Europe, slower growth in emerging markets and
increased competitive manufacturing capacity. The increase in debt from the
issuance announced today will also lead to higher leverage, although it will
help reduce the company's pension liabilities and volatility tied to discount
rates and asset returns.
Concerns include persistently negative free cash flow, heavily underfunded
pension plans and upcoming labor negotiations in the U.S. Relatively large
swings in working capital throughout the year also are a concern, as the company
relies on fourth quarter inflows to support its full-year operating cash flow.
Although GT's profitability in North America exceeded its expectations in 2012,
the European market has lagged expectations, and upcoming labor negotiations in
the U.S. with the United Steelworkers union (USW) introduce a near-term risk of
labor actions or increased costs resulting from a new contract that could lower
margins in the company's strongest market.
The recovery rating of 'RR5' on the proposed notes reflects Fitch's expectation
that recoveries would be below average, in the 10% to 30% range, in a distressed
scenario. The relatively low level of expected recovery is due to the
substantial amount of higher-priority secured debt in the company's capital
structure. Fitch also notes that in a distressed scenario, GT's substantial
pension obligations could potentially depress recovery prospects further for the
company's unsecured creditors.
Fitch expects global tire market conditions to remain challenging over the
intermediate term, which could constrain GT's top line growth potential for
several years. In particular, economic weakness in Europe and slower economic
growth in several key emerging markets, especially China and India, will
pressure demand. Increasing global tire manufacturing capacity will also put
pressure on pricing, as will competition from rising Asian tire manufacturers.
Longer term, continued growth in the global car parc will drive increased
replacement and OE tire demand, while increasingly affluent consumers in
emerging markets will increase global demand for premium tires, both of which
will support GT's sales.
GT's pension plans remain substantially underfunded, due to a combination of
falling discount rates and a history of funding the plans at the statutory
minimums. In the U.S., the company's plans were underfunded by $2.7 billion at
year-end 2012, which was up from $2.5 billion at year-end 2011. To address the
underfunded status, GT announced earlier this month that planned to issue debt
to pre-fund its U.S. pension obligations once the plans were frozen. As noted
above, Fitch expects proceeds from the proposed issuance will be used to make
voluntary contributions to those frozen plans. GT is also working to freeze its
non-salaried U.S. pension plans, and if that is completed successfully, it could
also issue debt to fund those obligations. Freezing the non-salaried plans could
be complicated and will likely be an additional challenge to overcome in the
upcoming USW negotiations.
On an EBITDA basis, GT's leverage (debt/Fitch-calculated EBITDA) at the end of
2012 was flat with year-end 2011 at 2.8 times (x) as both debt and EBITDA
declined slightly. However, funds from operations (FFO) adjusted leverage rose
to 6.1x from 3.9x as FFO (including preferred dividends) declined to $552
million in 2012 from $1.4 billion in 2011. Balance sheet debt was $5.1 billion
at Dec. 31, 2012, down from $5.2 billion at Dec. 31, 2011. Liquidity at year-end
2012 was relatively strong, with $2.3 billion in cash and cash equivalents and
another $1.8 billion available on the company's primary U.S. and European
revolvers. Free cash flow improved in 2012, but it was still negative $118
million, up from negative $285 million in 2011. Fitch expects free cash flow to
be pressured again in 2013, but liquidity will remain more than adequate to fund
the company's operations over the intermediate term.
Positive: Future developments that may, individually or collectively, lead to a
positive rating action include:
--The company producing positive annual free cash flow on a sustained basis;
--An increase in the company's global margin performance;
--A sustained decline in leverage;
--A substantial improvement in the funded status of the company's pension plans.
Negative: Future developments that may, individually or collectively, lead to a
negative rating action include:
--A significant decline in demand for the company's tires;
--An unexpected increase in costs, particularly related to raw materials;
--A labor action stemming from the company's USW negotiations;
--A decline in the company's cash liquidity below $1 billion;
--A significant increase in long-term debt, particularly to support
Fitch Ratings, Inc.
70 West Madison Street
Chicago, IL 60602
Craig D. Fraser
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email: