Moody’s affirms Goodyear rating, says “outlook positive”

Moody’s Investors Service has affirmed Goodyear Tire & Rubber Company’s, Corporate Family Rating at Ba3 and Probability of Default Rating at Ba3-PD. In addition Moody’s has revised the company’s rating outlook to positive from negative. The Speculative Grade Liquidity Rating was affirmed at SGL-2. The news is likely to be interpreted as a signal of improved financial performance at Goodyear, following the publication of good financial results from the US tyremaker yesterday (13 February 2014). The timing of the announcement is also interesting in light of the new that Goodyear and Sumitomo are dissolving their joint venture.

According to Moody’s, the revision of Goodyear’s rating outlook is to some extent based on the US$1.15 billion cash contribution to the company’s pension plan which reduces pro forma leverage to about 3.9x (inclusive of Moody’s standard adjustments) for the year-end 31 December 2013 from about 5.3x for the LTM period ending September 30, 2013. “This action, along with Goodyear’s ongoing progress with improving profit margins through improving product pricing and mix, is a step change toward the company’s stated goal of achieving a (debt+pension)/(EBITDA+pension expense) leverage (excluding Moody’s standard adjustments) of 2.5x by 2016,” Moody’s explained in its rating affirmation statement.

Goodyear’s pension contribution was made from existing cash balances and Moody’s believes that the use of existing liquidity to fund the pensions demonstrates the company’s confidence in the free cash flow generation of the business. The pension funding is being characterised as “the latest in a series of actions to de-risk the company’s US unfunded pension obligations.” The completion of the pension contribution enables Goodyear, under the terms of the existing labour contract, to freeze the remaining United Steel Worker pension plans, which will help contain pension costs in the future. However, this is unlikely to be warmly received by US workers and unions themselves.

Moody’s even hinted that a positive rating change “could result from continued de-leveraging of Goodyear’s balance sheet, or if industry conditions evolve to permit the company to sustain better margins through sustained product pricing and/or lesser exposure to volatile commodity costs.” However the credit ratings agency also warned that a lower rating outlook or rating itself could result if Goodyear is unable to offset pressures from weak volume trends, competitive pressures, and increasing raw material costs through the combination of improved product mix, pricing, or restructuring actions.