NEW YORK — American Tire Distributors Inc. (ATD) has a greater risk of default, according to the latest report by Moody's Investors Service Inc.
Moody's said Wednesday evening that it changed ATD's Probability of Default Rating (PDR) and senior subordinated notes, to Ca-PD (from Caa3-PD) and C (from Caa3), respectively. The decision comes following ATD's Sept. 6 announcement that it had reached an agreement in principle with holders of 70 percent of its bonds on terms of a recapitalization transaction.
ATD, North America's largest tire distributor, said the move is expected to reduce the company's debt by up to $1.1 billion.
Moody's said that all other ratings, including the company's Caa2 Corporate Family Rating (CFR) — $720 million ($696 million outstanding) senior secured term loan due 2021— and Caa1 senior secured bank debt (term loan) rating — $1,050 million senior subordinated notes due 2022 — continue to be under review for downgrade.
In its report, Moody's said ATD missed an interest payment while agreeing in principle with bond-holders to accept “70 percent of its notes ($1,052 million outstanding in aggregate) to convert their debt into a 95-percent stake of the company's restructured common equity.”
An ATD spokesman said the missed interest payment was intentional.
"In connection with our previously disclosed agreement in principle with the majority of our bond-holders, ATD elected to enter the grace period permitted under our debt agreements and defer making an interest payment that was due on Sept. 4," the spokesman said.
"This agreement will reduce the company's debt by up to $1.1 billion and provide financial flexibility as we continue our ongoing transformation. The company has liquidity and intends to continue working with its manufacturer partners and serving its customers as normal.”
ATD, Moody's said, is working to extend the maturity of its revolving credit facilities and the term loan.
Moody's said it will consider the proposed debt transaction a “default" since it is a "distressed exchange" and will cause affected stakeholders significant loss “relative to the original issuance.”
Moody's said it will assign ATD's PDR with an “/LD” designation when the debt agreement officially closes, indicating a limited default. It said it would remove the designation after three business days.
“The situation remains fluid, with lingering uncertainty as to the exact form and resolution of the requisite debt restructuring that will be completed; hence the continuing review,” said Inna Bodeck, Moody's lead analyst for ATD.
Moody's notes that all remaining debtors must agree to the proposal, which it said is not a certainty.
Should the agreement be final, Moody's said ATD will have successfully reduced its debt and associated debt service costs, but it also cautions that the tire distribution industry continues to evolve rapidly.
“If a consensual restructuring through such an exchange of debt for equity is unsuccessful, we believe that the company will more likely have to restructure its obligations through the bankruptcy court process, which would entail greater near-term losses for lenders,” Ms. Bodeck said.
Moody's said it will reassess ATD's CFR and debt instrument ratings over the next month, and it predicts the CFR will increase but the debt instrument ratings might be “exposed to potential downgrade if the notes exchange goes through, and both subject to negative prospective revision if it does not.”
Moody's said the loss of Goodyear and Bridgestone Americas as key suppliers will continue to result in decreased company earnings, profitability and cash flows. It projects ATD's debt-to-EBITDA will exceed double digits by the end of 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 (even assuming the current technical payment default is ultimately cured and the lines remain available for borrowing at all),” Moody's said.
It said the ratings are tempered somewhat by the company's strong market position, the historic stability of replacement tire demand and ATD's footprint across North America.
Moody's cautioned that the ratings could be downgraded if the proposed agreement does not close, if the likelihood of default rises and/or Moody's recovery expectations weaken more.
Moody's said the potential of “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,” would affect this outcome.
Conversely, Moody's said it could upgrade ATD's ratings should the proposal be finalized, and if the company is able to at least partially replace anticipated Goodyear-Bridgestone sales losses, while growing EBITDA so that “adjusted debt-to-EBITDA is significantly reduced, positive free cash flow is expected to be sustained, and at least an adequate liquidity profile is assured.”
Moody's said ATD had revenue of $5.4 billion for the year ended June 30, 2018.