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August 12, 2020 05:00 PM

Tire makers expected to fare better as Moody's downgrades certain auto parts makers

Jim Johnson
[email protected]
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    NEW YORK — Tire makers and aftermarket auto parts companies likely will fare better than suppliers of parts for new vehicles, according to a new report.

    Moody's Investors Service published its report on the auto parts market recently.

    "Through the first months of the coronavirus pandemic, aftermarket auto parts suppliers demonstrated their ability to adjust their operations and inventory levels to significantly reduced demand levels. As retailers and the distribution channel restocked, these companies benefited from an early recovery of demand," Moody's said in the report.

    "We expect them to reverse most of their cost-saving actions as demand recovers over the coming quarters. Free cash flow for aftermarket parts suppliers should therefore be reasonably robust by year-end 2020."

    The credit rating agency believes consumers are more likely to invest in their existing vehicles rather than purchase new ones during these tough economic times.

    "This should benefit large tire manufacturers, which typically generate around three-quarters of their revenue in the more profitable aftermarket segment of the tire market and only one-quarter in the lower-margin business of selling tires to automakers," Moody's said.

    Moody's, since March, has downgraded some $137 billion of about $212 billion in rated debt for the auto parts suppliers sector because of its view on the new vehicle market.

    "Two thirds of companies in the sector have negative rating outlooks because the global recession will have a severe impact on their operating performance, and credit metrics and could lead to rating downgrades. Amid a partial recovery in global GDP, auto sales volumes are likely to remain below 2019 levels through at least 2022," said Matthias Heck, a vice president and senior credit officer at Moody's, in a statement.

    Moody's did not downgrade ratings for Bridgestone Corp., Group Michelin, Cooper Tire & Rubber Co., and Hankook Tire & Technology Co.

    But the company did downgrade Goodyear a notch due to "the deteriorating global economic environment."

    "Our downgrade of Continental (A.G.), the world's fourth largest tire manufacturer, was driven by challenges in the group's automotive technologies divisions," Moody's reported.

    The downgrade of debt from auto parts suppliers exceeds the debt downgrade of $130 million from auto makers between mid-March and mid-June, the rating company said.

    "In the wake of the global recession brought on by the coronavirus outbreak, we downgraded the ratings of 24 of out the 62 rated auto parts suppliers," Moody's said, with two-thirds of the companies now having "negative rating outlooks."

    Vehicle makers are expected to sell millions fewer units in 2020 compared to last year.

    "The global economic contraction, soaring unemployment and the temporary closures of auto assembly plants have slashed vehicle demand and production and left the global automotive supply chain and related distribution channels in disarray. In May, we lowered our global light vehicle sales forecast, projecting at least a 20% slump in unit sales this year, including a 25% drop in the US and a 30% plunge in Western Europe, following two years of more modest annual declines after sales peaked in 2017," Moody's stated.

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