NEW YORK (June 17, 2002) — Based on expectations that Goodyear will continue to face near-term challenges in restoring its financial footing, Moody's Investors Service on June 14 downgraded the tire maker's credit rating to junk status.
Moody's cited Akron-based Goodyear's “recent weak financial performance” which it forecast “will continue through 2002 due to flat overall unit demand and an unfavorable shift in sales mix.”
Goodyear's “subpar” operating performance in recent years, Moody's said, is “largely due to inventory management problems, a decline in global tire volumes and a relatively high fixed-cost structure.”
On Feb. 21, New York-based Moody's placed Goodyear's debt ratings under review for possible downgrade, saying the move “reflects Goodyear's lackluster financial performance in 2001 and the rating agency's concern that volumes in both the OEM and replacement market will remain depressed through the intermediate term, resulting in weaker cash flow generation and further delay in a meaningful reduction of debt.”
The June 14 downgrading by Moody's lowers Goodyear's ratings to “Ba1” from “Baa3,” affecting about $2.2 billion of senior unsecured debt, according to a statement released by the financial investment firm.
It said the rating “could come under pressure” if Goodyear is unable to achieve the full level of expected benefits from restructuring initiatives. “Furthermore, the inability to generate top-line growth and increased revenue-per-tire, coupled with a rise in raw materials costs, could also place downward pressure on the Ba1 rating.” Moody's said the negative outlook also reflects its concerns that “increasing cash outlays could result from Goodyear's substantially under-funded pension plan. In addition, the company's potential exposure to ongoing asbestos and product liability litigation will be monitored.”
Moody's noted that Goodyear's under-funded pension obligation “ballooned to over $1 billion on a consolidated basis at year-end 2001, up from an under-funded status of $302 million the prior year.” The rating agency, it continued, “believes that this liability could represent a significant, intermediate-term call on cash.”
A Goodyear spokesman noted that the move by Moody's was basically the same as Standard & Poor Corp.'s decision Jan. 18 to downgrade the tire maker's debt rating by two levels which, in that case, placed the company's senior unsecured debt into a category often referred to as “junk.”
“We're disappointed but not surprised by Moody's rating action,” he said. “We have plans in place to improve our profitability throughout the year. There is little immediate impact from this action.”