Fitch Downgrades Goodyear's Debt Ratings to 'B'

    CHICAGO--April 11, 2003--Fitch Ratings has downgraded the senior unsecured debt ratings of The Goodyear Tire & Rubber Company (Goodyear) to 'B' from 'B+' and assigned a rating of 'B+' to the senior secured bank facilities. Approximately $5 billion of debt is affected. The rating action is based on continued erosion of operating fundamentals in Goodyear's core North American Tire operations which continue to face major challenges, onerous pension obligations funding, and execution risk to the operating turn-around plan in the midst of weak industry demand and intense competition. The downgrade of the senior unsecured debt also reflects the weaker position of unsecured creditors under the recent bank agreement which granted security interest to the bank creditors. While cash holdings and the restructured financing arrangements afford near-term liquidity, lack of significant operating improvements in the next 9 to 15 months could jeopardize availability of these funding sources due to covenant violations. With the rating action, the Rating Watch Negative has been replaced with Rating Outlook Negative.
    Goodyear's North American Tire operations lost $34 million on sales of $1.6 billion and $36 million on sales of $6.7 billion in the 4th quarter 2002 and full year 2002, respectively, with tire units shipped dropping off 8.5% for the quarter and 7.2% for the year. In an industry environment which saw replacement tire demand for light vehicles flat to off slightly in 2002, Goodyear saw its three principal brands, Goodyear, Kelly, and Dunlop collectively lose approximately 3 percentage points of market share in passenger tires and 1 percentage point in light trucks. Poor channel management, particularly with independent dealers and distributors who handle about 60% of Goodyear's replacement tires, ineffective pricing and discounting policies, and poor execution of order fulfillment were some of the reasons which contributed to the operation's under-performance. Further, Goodyear's brands are getting pressured from low cost import brands in the lower segment of the pricing spectrum and by Michelin and others in the premium segment of the pricing spectrum.
    The turn-around strategy laid out by the new management team hopes to address some of these fundamental operating issues in North American Tires. However, substantial hurdles remain in addressing the company's operating performance in the North American Tires segment. Raw material costs for oil based products and synthetic rubber which had been a comparative positive in 2002 versus 2001 will reverse in 2003. Oil and other raw material prices had averaged much higher in 2002 and the effect of the higher cost basis will filter through Goodyear's operations in 2003, likely compressing gross margins. Increased pension and healthcare benefit expenses for employees will further pressure margins. Fitch estimates that these factors together will exceed a list of Goodyear's cost saving targets that have been announced to date.
    Relief from price pass-throughs for Goodyear will be limited due to its competitively weakened position and the current volume slack environment. While some portion of an announced price increase earlier in 2003 may be sticking, Goodyear will likely remain exposed to pricing moves of competitors who currently enjoy greater margin flexibility. Also, replacement tire demand in North America in the first quarter of 2003 was off markedly, suggesting that Goodyear is unlikely to see any tailwind in 2003 from replacement industry demand pickup or from meaningful price increases.
    While Goodyear intentionally may wind down some OE tire programs in its effort to better manage large accounts, in the near term, OE volume helps to absorb structural overhead and helps conversion costs. As such, OE vehicle production build rate softening in 2003 will present further operating challenges on the industry demand front.
    Attendant with the lower unit shipments, Goodyear's plant capacity utilization had fallen into the mid-80% range suggesting that capacity rationalization may be necessary in order to improve its operating performance. Goodyear is currently in negotiations on a labor contract with about 16 thousand union workers throughout most of its North American tire plants. Any production stoppage resulting from this situation will significantly impede efforts to improve its North American operations. The announcement that Goodyear will dramatically increase its import of low-end tires will result in further pressure to reduce capacity, potentially complicating current labor talks.
    Due to capital expenditure limitation requirements associated with the restructured bank arrangements, even as Goodyear tries to implement its North American turnaround strategy, major North American competitors will hold a competitive advantage in capital investment flexibility, presenting further challenges to Goodyear.
    A mild offset to the operations in North America has been the gains seen in the non-North American tire operations in 2002. Given the cost headwinds anticipated for 2003 and the weak economic outlook for Europe and rest of the world, however, Fitch believes that further operating gains in non-North American Tire operations will be difficult to achieve.
    With the restructuring and new financing arrangements, Goodyear replaces $2.9 billion of unsecured and receivables based financing arrangements with $3.3 billion of financing arrangements, all of which are secured. Of the various financial covenants and terms of the credit arrangements, Fitch believes that the 2.25:1 consolidated EBITDA-to-interest expense covenant is most vulnerable to violation in the forthcoming periods in light of expected operating challenges.
    Fitch estimates that pro-forma for the transaction, Goodyear will have unused capacity of around $1 billion of committed lines and $600 million plus of cash for liquidity. However, given the sizable cash calls looming ahead with stated minimum ERISA pension contribution of around $425 million in 2004 and sizable amounts thereafter as Fitch anticipates, higher financing costs, potential restructuring outflows, plus net absorption of liquidity into operation as Fitch expects, Goodyear's current liquidity may face stress even before the credit lines come due in 2005. Potential sale of the Chemicals Division may help augment the liquidity profile. But, given the weakness in the markets and large exposure to internal Goodyear sales, Fitch does not believe the sale of Chemicals Division would generate robust proceeds.
    This rating is provided by Fitch as a service to users of its ratings and is based primarily on public information.