After filing for Chapter 11 bankruptcy at the beginning of October, American Tire Distributors (ATD) asked the court to pay back critical vendors money it owed them before its filing so it can continue business as usual.
An ATD spokesperson confirmed that ATD has received products from all of the company’s manufacturer partners since the filing and that the company does not anticipate issues with availability and product supply moving forward.
For tire dealers, this means that your shops will have inventory not only for the winter months but also for the foreseeable future as the company goes through the Chapter 11 reorganization process.
If you’re a Tire Pros dealer or part of the ATD network, below are a few common questions you could be asking about how this may affect your business.
Will ATD’s brands change?
When Goodyear Tire & Rubber Co. and Bridgestone Americas announced the formation of TireHub, its joint tire distribution venture, in April, Goodyear pulled all of its tire lines from ATD, and Bridgestone pulled its passenger and light truck lines from the nation’s largest tire distributor.
After the companies pulled product lines, certain tire manufacturers and other vendors restricted trade terms, and in some cases, asked ATD to post letters of credit. According to court documents, ATD estimated that these actions already cost them around $130 million in “much-need liquidity.”
“The Debtors (ATD) are therefore at a critical juncture of need to convert certain Goodyear and Bridgestone customers to other brands or risk losing business of certain customers in the foreseeable future,” ATD said in court filings. “Any interruption in the supply of replacement tires — however brief — could incent other suppliers to attempt to shift business to the Bridgestone and Goodyear distribution platform or the Debtors’ national or regional competitors such as NTW or Dealer Tire.”
Many major tire manufacturers such as Continental, Pirelli and Michelin told Tire Review that they continue to support ATD as they go through the court-supervised process.
What does this mean for my winter tire inventory?
ATD has assured dealers that deliveries are continuing without interruption. With commitments that would provide continued access to its credit facility plus $250 million in new financing, ATD has also said that it intends to pay continuing manufacturer partners and vendors in full for existing claims. Those that are named critical vendors will be getting at least some of that payment before the Chapter 11 process ends.
Last year, tire sales accounted for 97% of ATD’s net sales, court records say. Another reason ATD gives the court for needing to pay these critical vendors is the upcoming winter tire selling season, which is its most profitable time of year.
How does ATD naming “critical vendors” support me in getting my inventory?
A third argument ATD makes to pay these critical vendor claims is for it to receive credits from its vendors on product already sold. ATD receives significant credit from certain vendors that it can apply toward bills due to a respective vendor. Those credits usually include volume-driven rebates and national account credits for products ATD ships to its customers.
When ATD filed for Chapter 11 Oct. 4, its vendor credits amounted to around $51.2 million, which the company says is “a meaningful portion” of its EBITDA, or earnings before interest, tax, depreciation and amortization, according to court records.
ATD says failure to pay the critical vendors may result in reductions to vendor credits in the future whether vendors refuse to honor the accrued credits or issue more, which would harm ATD’s business.
What happens next?
Typically in Chapter 11 cases, companies pay back their debt after a financial restructuring plan is completed and approved by the courts. For many ATD vendors, that is still the case. For those named critical vendors, ATD has asked to pay these vendors prior to the plan’s confirmation so that they can continue to supply product to their customers, which include Tire Pros dealers. Although the list of these vendors is not part of public record, some of those vendors may be listed in ATD’s list of its 30 largest unsecured claims.
A final hearing on ATD’s request concerning its critical vendors is scheduled for Oct. 26.
FULL COVERAGE: ATD’s Chapter 11 Restructure and Company News