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Moody’s Downgrades ATD Probability of Default Rating After Debt Plan Announcement

Moody’s downgraded ATD’s probability of default rating and other ratings for senior subordinated notes after it announced a plan for a debt-for-equity exchange that it will offer bondholders.

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Moody’s Investor Services has pained a bleak picture for American Tire Distributors’ (ATD) financial outlook.

This week, Moody’s downgraded ATD’s probability of default rating and other ratings for senior subordinated notes after it announced a plan for a debt-for-equity exchange that it will offer holders of the rated notes. All other ratings also remain under review for a downgrade, Moody’s said.

Under the agreement, ATD promised to undergo a “recapitalization transaction,” meaning the company will restructure its debt and equity mixture to become more stable. ATD said the recapitalization plan proposed will reduce the company’s debt by up to $1.1 billion and provide financial flexibility as it continues its transformation.

The agreement was made in principle with holders of more than 70% of its bonds, which means it is subject to finalizing documentation. Under the recapitalization plan, ATD’s continuing manufacturer partners and trade vendors are expected to be paid in full for goods and services provided, ATD said.

“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. “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.”

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An ATD spokesperson reaffirmed today the details of the plan and assured that the company has the liquidity to meet its business obligations.

“In connection with our previously disclosed agreement in principle with the majority of our bondholders, ATD elected to enter the grace period permitted under our debt agreements and defer making an interest payment that was due on September 4th. 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.”

Stuart Schuette, president and chief executive officer of ATD, said in a press release announcing the agreement. “Our journey over the past 18 months has been one of significant progress, and we are now taking steps to strengthen our financial position as we continue our transformation. The actions we are taking are intended to reduce our debt and create financial flexibility so we can enhance the strategic initiatives, key technologies and talent that will drive our transformation forward. The agreement we reached with our bondholders reflects their confidence in our business and paves a way for us to implement our recapitalization on an accelerated basis. We are confident in our future, and we look forward to keeping the power of choice alive and providing our customers the most connected and insightful automotive solutions in the industry.”

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If the proposed debt exchange is completed, Moody’s said it will consider it a distressed exchange since it is aimed at alleviating pressure on a capital structure that it has already deemed unsustainable and will result in a significant economic loss to affected noteholders.

Kirkland & Ellis LLP is serving as legal counsel to ATD and AlixPartners LLP is serving as an operational advisor. Moelis & Company LLC is serving as financial advisor.

 

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