Fitch Ratings has downgraded Goodyear Tire & Rubber Co.'s senior unsecured rating from "B" to "CCC+" and the senior secured bank facilities from "B+" to "B." Fitch's Rating Outlook remains "Negative."
In its announcement of the downgrade, Fitch said approximately $5 billion of debt (as of Sept. 30, 2003) is affected.
Here's the rest of the announcement and analysis, in its entirety.
"The rating action is based on lack of resolution in the investigation and review of the company's accounting practices and certain reported financial statements. An informal inquiry by the Securities and Exchange Commission (SEC) prompted by two previous company announcements (December and October 2003) of accounting problems has now escalated into a formal SEC investigation.
"These latest issues have further delayed the filing of timely financial statements and could hinder Goodyear's access to credit facilities and external capital markets. Access to significant external capital is required in order to meet heavy debt maturities, pension funding requirements, and other cash needs over the next few years.
"The delays and questions surrounding the company's financial statements have precluded the ability to track the progress of the company's critical cost restructuring program. Furthermore, Goodyear appears not to have met the terms of its latest union contract which required the company to raise external financing prior to year-end 2003.
"The downgrade also reflects the deterioration in the relative position of the unsecured creditors vs. senior creditors due to the layering on of additional secured bank facility and the likely granting of additional security in pending and future transactions.
"Even as Goodyear is currently in negotiations with its banks to amend and expand its existing $1.3 billion senior secured asset-backed credit facilities (due March 2006) by $650 million of additional term loans, a material charge in its equity account resulting from the accounting problems could breach existing loan covenants.
"Goodyear had to meet a minimum consolidated net worth requirement of $2.8 billion for quarters ending in 2003. At Sept. 30, 2003, Goodyear's consolidated net worth amounted to $3.1 billion. A consolidated net loss in the fourth quarter plus a charge to equity accounts to reconcile accounts could potentially breach the minimum net worth threshold.
"The $650 million addition to the existing $1.3 billion senior secured asset-backed credit facilities currently in the works and the recently announced $650 million private financing are intended for refinancing of some earlier maturing debt as well other purposes. While these transactions may relieve some pressure on the very heavy amount of debt coming due in the next 15 months, Goodyear still faces the challenge of refinancing the $750 million senior secured U.S. revolver, $645 million senior secured U.S. term, and the $650 million senior secured European facilities, which all mature in April 2005.
"In June 2005, approximately $467 million will come due with the maturity of a Euro note issue.
"Liquidity at Sept. 30, 2003, was provided by $1 billion of cash and equivalents and $254 million of availability under committed bank lines. While the nominal cash balance shown on the period end consolidated balance sheet are significant, nearly half of the amount was held in foreign operations, which may impact the amount available for repatriation due to local operating needs, local laws, tax implications, and applicable credit facility agreements.
"In the near term, Goodyear will need substantial liquidity in its North American tire operations. Goodyear will have to make contributions of around $250-270 million for ERISA pension funding requirements. Another large cash consumption item will be working capital outlays in the first half of the year.
"Typically, Goodyear sees a significant rush of accounts receivable paydown before year-end closing, which then builds up again through the first two calendar quarters. The working capital swing can be in the hundreds of millions. Also, the Entran II legal situation will require a cash contribution of $40 million in 2004 if the current settlement proposals hold. Cash usage associated with restructuring and/or rationalization charges should amount to more than $50 million.
"Operationally, concerns remain whether problems with North American Tire operations have yet been resolved. Market share for the flagship Goodyear brand continues to slip in the critical U.S. light vehicle replacement market, dropping a half a percentage point for both passenger cars and light trucks in 2003. Overall for Goodyear, share losses amounted to about 0.3% in 2003.
"Competitive pressures from Bridgestone and Michelin, both of whom gained market share during 2003 in the U.S. replacement market, are not expected to relent.
"In addition, cost pressures continue to mount in the area of raw materials. On-going healthcare cost and pension expense increases will also burden the cost structure.
"While the Huntsville plant closure and other productivity measures which resulted from the USWA (United Steelworkers of America) union talks will help in improving asset utilization in North American tire operations, the overall picture is unclear if the productivity gains will be enough to allow North American Tire operation to be profitable in the near future."
