Standard & Poor's Rating Services has lowered its corporate credit rating for American Tire Distributors Inc. It also has dropped its rating on the company's senior secured notes.
Here is a snapshot of the S&P decisions, as reported by Thomson Reuters.
1. From "B+" to "B" on the corporate credit rating. "The company continues to expand: Net sales grew 10% in the third quarter, compared with the same quarter a year ago, due to new distributions centers, acquisitions, and higher tire pricing.
"The company's expansion has led to a significant -- and we think sustained -- increase in leverage that falls outside our expectations for the 'B+' rating."
S&P says ATD's outlook is "stable."
2. From "B-" to "CCC+" on senior secured notes. "The recovery rating on this debt remains '6,' indicating our expectation of negligible recovery (0%-10%) for noteholders in the event of default."
Standard & Poor's offered the following rationale behind its decision to lower ATD's corporate credit rating.
"We view ATD's business risk as 'weak,' reflecting its limited geographical diversity, fierce competitive landscape, and narrow scope of operations. Still, at the same time, we believe the company's relative size advantage allows it to carry the industry's broadest product line, deliver items more efficiently than its competitors, and spend less, as a percentage of sales, than its competitors to invest in information systems.
"In addition, although ATD sells economy-brand tires, the company's sales mix is focused on high-margin products such as high- and ultra-high-performance tires, flag brands, and large-rim-diameter products."
S&P describes ATD as the only tire distributor with a national presence, with 102 warehouses in the Southeast, Mid-Atlantic, Midwest, West, Southwest and Northeast regions.
"However, because the market is highly fragmented, ATD's national market share is only about 10%. No one customer accounts for more than 2% of sales, which reduces customer credit risk exposure.
"A key dimension of ATD's strategy is to expand geographically by making acquisitions. Additionally, we believe the company takes advantage of acquisition opportunities to saturate its current markets.
"ATD has also been increasing sales by penetrating the auto dealership sales channel. It also has been focusing directly on consumers through its TireBuyer.com Web site, which shows a wide range of products, enables consumers to locate nearby tire retailers in ATD's network, and provides the total cost of the purchase, including installation fees."
Despite the downgrade, S&P says it believes the company's business strategy "should continue to increase profitability and deliver fairly stable operating performance."
ATD generated $915 million in revenue in the third quarter of 2012, up 10.2% from the same period one year ago. Its gross margin in the third quarter was 16.3%, up slightly compared to the same period last year. (Click here to read more about ATD's 3Q financial results.)
"We expect the company to generate positive free cash flow in 2013," adds S&P.
ATD recently filed the third amendment to its "Fifth Amended and Restated Credit Agreement" with the Securities and Exchange Commission. The amendment increases ATD's revolving line of credit from $650 million to $850 million.
American Tire Distributors Holdings Inc., which was purchased by TPG Capital L.P. in April 2010, owns 100% of the issued and outstanding capital stock of American Tire Distributors Inc. For more information on ATD, visit www.atd-us.com.
