NEW YORK — Moody's Investors Service has placed its ratings for American Tire Distributors Inc. (ATD) under review for downgrade, in light of Bridgestone Americas Inc.'s decision to stop supplying ATD in the U.S. with passenger and light truck tires.
"The magnitude and timing of earnings and cash flow erosion following the loss of two prominent suppliers will be more severe and immediate than previously envisioned," Inna Bodeck, Moody's lead analyst covering ATD, said.
"This latest development further evidences the ongoing shift in the approach of premium tire manufacturers to the evolving marketplace, and ultimately represents an incremental resizing of the tire distribution channel."
Moody's review includes ATD's Caa2 Corporate Family Rating (CFR) and Caa3-PD Probability of Default Rating, as well as the Caa1 and Caa3 ratings for the company's senior secured term loan and senior subordinated notes, respectively.
Moody's issued a similar ratings review in early May after Goodyear notified ATD it intended to stop distributing its tires through the Huntersville, N.C.-based wholesaler.
Moody's review will focus on the business and financial implications of this adverse development for ATDI, including the company's top line, profitability, cash flow and liquidity measures. It will also focus on the company's ability to act quickly and in a disciplined manner.
Moody's noted that ATD relies heavily on its various revolving credit facilities, with one-year average usage of approximately $670 million (and peak usage of $760 million during the first quarter of 2018).
Moody's anticipates that the loss of Goodyear and Bridgestone will result in a material deterioration in the company's earnings, profitability and cash flow profile, and on a fairly immediate basis. Moody's projects that ATD's debt-to-EBITDA will exceed double-digits by year-end 2019 as the company manages through the anticipated volume decline.
Further constraining the ratings are the company's low margins and liquidity concerns related to eroding cash flows and increasingly constrained availability under its asset based credit facility. The rating does continue to be tempered to some extent, however, by the company's strong market position, the historic stability of replacement tire demand, and ATD's footprint across North America.
The ratings could be downgraded if the likelihood of default rises and/or Moody's recovery expectations weaken further, including through a potential pre-emptive restructuring of debt obligations. This could be precipitated by a material deterioration in liquidity, potentially stemming from more restrictive terms from suppliers and/or more restrictions in supply, an inability to flex the cost structure in line with lower volumes, or a loss of access to the company's asset-based lending facilities.