Moody’s downgrades American Tire Distributors

On 5 September Moody’s Investors Service downgraded its Probability of Default Rating and senior subordinated notes rating for American Tire Distributors, Inc., to Ca-PD (from Caa3-PD) and C (from Caa3) respectively, following the company’s proposed debt-for-equity exchange offer to holders of the rated notes. All other ratings, including the company’s Caa2 Corporate Family Rating and Caa1 senior secured bank debt (term loan) rating remain under review for downgrade.

On September 4, 2018, ATDI announced that it had missed an interest payment and agreed in principle with holders of 70 per cent of its notes ($1,052 million outstanding in aggregate) to convert their debt into a 95 per cent stake of the company’s restructured common equity. The company is also working to extend the maturity of both its revolving credit facilities and the term loan.

If the proposed debt exchange is completed, Moody’s will consider it a distressed exchange since it is aimed at alleviating pressure on a capital structure that the rating agency has already deemed unsustainable, and also in that it will results in significant economic loss to affected noteholders relative to the original issuance. As such, the transaction will be considered an event of default under Moody’s definition of default. Moody’s would append ATDI’s Probability of Default Rating with an “/LD” designation at the close of the debt exchange to indicate the limited default, with the designation then being removed after three business days.

“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 ATDI. The proposal notably entails the company’s solicitation of consent from all remaining debt participants, the receipt of which, Moody’s believes, is far from assured. Moody’s noted that a successful exchange as contemplated would materially reduce the company’s debt burden and associated debt service costs, but also acknowledged ongoing risks related to the evolving and heightened competitive environment for the tire distribution industry. “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,” added Bodeck.

Moody’s indicated that it will reassess the company’s CFR and debt instrument ratings over the course of the next month, with the former likely to go up but the latter exposed to potential downgrade if the notes exchange goes through, and both subject to negative prospective revision if it does not.