Goodyear Tire & Rubber Company, Downgraded

The Senior Long-Term Debt rating for The Goodyear Tire & Rubber Company
is being downgraded to BBB (low) from BBB and the trend is changed from
Stable to Negative. Profitability levels are poor having declined for
the past four years and the recovery is uncertain. Over this period, the
Company managed to lower its cost per tire but this was largely offset
by a drop in revenue per tire. The drop in revenue per tire is due to
weak foreign currencies, which affect about 50% of revenues, exacerbated
by industry overcapacity in Asia causing cheap imports into North
America and Europe. Overall profitability reflected Goodyear's strategy
of focusing on production efficiencies while not capitalizing on product
marketing. This made product differentiation more difficult to achieve
as many consumers view tires as a commodity where price is the
determining factor. Despite the long-term structural challenge of Asian
imports, Goodyear is focused on increasing its revenue per tire through
improved mix and higher profitability from OEM sales. The global tire
industry should have more rational competition in the future with less
emphasis on price which should make this goal more attainable. Michelin
has stated that prices need to increase in the OEM and the replacement
market and has a goal of increasing operating margins to 10% by 2005
compared to 6.6% in 2001. Bridgestone had been aggressive on price in
the mid-1990s aiming to increase share but has become more focused on
profitability after experiencing product liability problems with the
Firestone brand.  While there is some uncertainty as to the timing and
ultimate success of changes underway at Goodyear, given favourable
characteristics of the industry (largely consolidated with the big three
controlling about 60% of share) and Goodyear's leading global position
within the industry (market share has been growing in major markets) the
Company should be able to restore profitability to levels consistent
with an investment-grade rating in a reasonable timeframe. The financial
profile is weakening and flexibility is decreasing as the Company
continues to have sub-par operating results. Debt levels are high
relative to the weak level of earnings and cash flow of the past two
years but should be manageable if earnings recover. While Goodyear's
liquidity position is not ideal, the Company appears to have adequate
flexibility. Efforts to reduce working capital have proven successful as
working capital was $1 billion below last years level in the first
quarter. This level is believed to be sustainable and allowed adjusted
net debt to decrease by about  $400 million to $4.2 billion at year-end.