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Moody’s Downgrades ATD Citing ‘Unsustainable Capital Structure’

“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,” says Inna Bodeck, Moody’s lead analyst covering ATD.

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American Tire Distributors ATD

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Moody’s Investors Service on May 10 made its determination to downgrade its ratings for American Tire Distributors, Inc. (“ATDI”), citing “unsustainable capital structure.” Approximately $1.8 billion of rated debt will be affected. These actions conclude the review for downgrade initiated on April 17, 2018 following the announcement of the surprising partnership between Goodyear Tire & Rubber Company and Bridgestone Americas uniting both company’s wholesale distribution operations to form TireHub, one of the largest tire distribution joint ventures in the United States.

“While the value proposition afforded by ATDI’s extensive distribution network and replacement tire assortment remains intact, we anticipate a material loss of business that will not be easily replaced,” said Inna Bodeck, Moody’s lead analyst covering the company. “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.”

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This determination now changes the outlook for America’s largest distributor of replacement tires from “rating under review” to “stable.”

The following ratings downgraded by Moody’s include: ATD’s “Corporate Family Rating” (to Caa2 from B3); “Probability of Default Rating” (to Caa3-PD from B3-PD); “Senior Secured Term Loan” (to Caa1 [LGD2] from B3 [LGD3]), and “Senior Subordinated Notes” (to Caa3 [LGD4] from Caa2 [LGD5]).

ATD’s Caa2 Corporate Family Rating broadly reflects the company’s very high financial leverage and narrow margins typical of distributors. Because ATD will no longer serve as a national distribution partner for Goodyear, Moody’s says the “substantial loss of at least one of its key suppliers will result in a material deterioration of the company’s earnings and profitability in the next 18 months.”

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The analysts also project that ATD’s debt will only increase over the coming year as it manages through the loss of Goodyear and transition to new partners. Moody’s says “high debt-to-EBITDA leverage (6.9x LTM 12/31/2017 incorporating Moody’s standard adjustments) will increase over the coming year as the company manages through 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.”

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On a brighter note, Moody’s says: “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 ATDI’s footprint across North America. The stable rating outlook factors in Moody’s expectations around meaningful volume and earnings losses over the next 12-18 months, notwithstanding the rating agency’s acknowledgment of the sustainability and importance of ATDI’s business model. The ratings incorporate a heightened risk of distressed bond exchange given deemed insufficient financial flexibility to fully adjust to the evolving operating environment, with subordinated noteholders likely to suffer the bulk of loss absorption in an event of default scenario and an above average recovery expectation ascribed to the corporate family’s obligations overall.”

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Moody’s adds that the ratings could be again downgraded if Moody’s expectations around the likelihood of default and recovery weaken further, including through a 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,” the report said, adding, “Ratings could be upgraded if the company is able to replace the anticipated loss of sales on a sustained basis and grow EBITDA such 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 ensured.”

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