ATD challenges Moody's decision to downgrade its bond ratings

NEW YORK — Moody's Investors Service has downgraded its ratings for American Tire Distributors Inc., but the Huntersville, N.C.-based wholesaler claims Moody's determination "does not reflect ATD's expected performance or where we actually stand financially."

Moody's decision to downgrade ATD's ratings is based largely on an anticipated "material loss of business" resulting from Goodyear's decision to stop distributing through ATD.

In the ratings services commentary, Inna Bodeck, Moody's lead analyst covering ATD, said, "While the value proposition afforded by ATD's extensive distribution network and replacement tire assortment remains intact, we anticipate a material loss of business that will not be easily replaced. All else being equal, the magnitude of the associated earnings and cash flow decline will compound an already levered financial risk profile, rendering a pre-emptive debt restructuring increasingly likely, in our estimation."

ATD countered Moody's assertion, saying: "In particular, Moody's actions are based on assumptions about the Company's capital structure and have nothing to do with ATD's performance, cash flow generation or our liquidity position.

"In fact, ATD is financially strong, and…we have a strong financial foundation and ample liquidity to continue working with our vendors and manufacturing partners as we always have.

"Given our value proposition and service capability, we continue to receive significant support from our customers who appreciate the role ATD plays in helping them drive their success," ATD added. "We are confident that ATD will continue to win by taking care of customers, delivering products they need and supporting them in ways that no one else can."

Moody's projects that ATD's already high debt-to-EBITDA leverage — 6.9 times over the past 12 months — will increase as the company deals with the anticipated decline in Goodyear volumes.

Further constraining the rating are liquidity concerns related to the company's modest cash flows and increasingly constrained availability under its asset-based credit facility, Moody's said.

The rating does continue to be tempered to some extent, Moody's said, by ATD's strong market position, the historic stability of replacement tire demand and ATD's footprint across North America.

The specific ratings changes are:

• Corporate Family Rating (CFR) to Caa2 from B3;
• Probability of Default Rating to Caa3-PD from B3-PD;
• Senior Secured Term Loan to Caa1 (LGD2) from B3 (LGD3)
• Senior Subordinated Notes to Caa3 (LGD4) from Caa2 (LGD5).

ATD's CFR rating of Caa2 "broadly reflects the company's very high financial leverage and narrow margins that are typical of distributors," Moody's said, adding that the loss of at least one of its key suppliers would result in a material deterioration of the company's earnings and profitability in the next 18 months.

ATD's response reflects heavily an open letter to stakeholders it issued April 24 following Moody's initial commentary on the proposal by Goodyear and Bridgetone Americas to create a joint wholesaling venture.