NEW YORK — The plan by Bridgestone Americas Inc. and Goodyear to create a 50/50 tire wholesale distribution joint venture is "credit negative" for independent wholesale tire distributors, including American Tire Distributors Inc. (ATD) and Dealer Tire L.L.C., Moody's Investors Service Inc. contends.
New York-based Moody's issued a pair of rating actions on April 17, a day after the Bridgestone-Goodyear announcement, putting both ATD's and Dealer Tire's ratings "under review for downgrade."
The Bridgestone-Goodyear announcement prompted Moody's to begin reviewing credit worthiness of these firms because the venture "will potentially limit tire supplies and intensify competition with larger companies possessing greater financial resource, according to the ratings reviews authored by Inna Bodeck, Moody's lead analyst for Goodyear and Dealer Tire.
"Unless independent distributors strike supply pacts with major tire makers," Moody's said, "the heightened competitive pressure will likely lead to lower earnings and free cash flow for these companies."
The Goodyear-Bridgestone tie-up follows a similar move in January by Group Michelin and Sumitomo Corp. of America to create a 50/50 tire distribution joint venture involving Michelin's TCi Tire Centers unit and Sumitomo's TBC Corp. subsidiary.
Moody's noted a distinction between these two announcements, saying while the Michelin/TBC transaction was meant to "be more of a complement to each company's existing distribution network," the Goodyear-Bridgestone venture is "more explicitly aimed at taking sales volumes that are currently handled by third-party distributors."
Both partnerships reflect efforts by major tire makers to combat stagnant volumes in the North American market, Moody's said, by assuming greater control over distribution to boost profitability.
Last year, Bridgestone, Goodyear and Michelin all reported soft operating results in North America, with replacement tire unit sales flat at Michelin and down about 4 percent and 2.7 percent at Bridgestone and Goodyear, respectively.
"Independent distributors are likely to respond by selling lower tiers of tires more aggressively through their more extensive retail networks," Moody's said.
ATD is the largest replacement tire distributor in North America, with the network of more than 140 distribution centers in the U.S. and Canada and 2017 revenue of about $5.2 billion. It sells most leading brands along with its own Hercules brand.
According to ATD, the top four brands account for about 55 percent of its tires and related products.
Given ATD's "significant" fixed costs, Moody's said, even a modest revenue decline triggered by the Goodyear-Bridgestone partnership likely will lead to a "substantial contraction" in earnings and free cash flow, sparking the need to take "costly restructuring actions."
If ATD is unable to reach some type of supply agreement with branded tire manufacturers, Moody's continued, the resulting earnings impairment will limit its ability to service debt and make capital investments necessary to support its operations.
The ratings review could affect ATD's revolving credit facilities — which average about $670 million annually — as well as nearly $1.8 billion in loans and notes. For Dealer Tire, the ratings could affect nearly $800 million in loans and credit facilities.
Neither ATD nor Dealer Tire has responded as yet to requests for comment.