Fitch Assigns Indicative Ratings to Goodyear's $3.6B New Bank Facilities

CHICAGO--April 13, 2005--Fitch Ratings has assigned indicative ratings to The Goodyear Tire & Rubber Company's (GT) new domestic senior secured bank facilities which the company announced earlier this week had been closed, as follows:

-- $1.5 billion asset-based first-lien revolving credit facility 'B+';

-- $1.2 billion second-lien term loan 'B';

-- $300 million third-lien term loan facility 'B-'.

Fitch also affirmed its rating of 'CCC+' for GT's senior unsecured debt. The new bank facilities replace approximately $2.6 billion of existing domestic bank facilities. The Rating Outlook is Stable.

In addition, Fitch has initiated an indicative rating of 'B+' on new senior secured, first-lien European bank facilities for GT's subsidiary, Goodyear Dunlop Tires Europe B.V. (GDTE) that were completed at the same time as GT's domestic facilities. The new GDTE facilities consist of $650 million equivalent of Euro-denominated revolving and term loan facilities and replaced a similar amount of existing bank facilities under which $400 million was outstanding at the end of 2004. The Rating Outlook is Stable.

All of the new bank facilities mature in 2010 with the exception of the $300 million term loan that matures in 2011. The refinanced debt carries lower interest rates and extends the maturities on Goodyear's bank debt that had been scheduled to mature between 2005 and 2007. At Dec. 3, 20041, 2004, Goodyear had approximately $5.7 billion of total debt outstanding on a consolidated basis.

Lien priorities have been simplified under the refinanced bank facilities which previously included various combinations of senior and junior liens. The 'B+' rating for GT's domestic first-lien bank facility takes into account an improved recovery position, as total commitments secured by the first lien declined to $1.5 billion compared to $1.98 billion prior to the refinancing. Further supporting likely recoveries is the addition of Goodyear's trademark and its pledge of domestic and foreign subsidiary stock that augment collateral already pledged under the previous facilities. The second-lien bank term loan is also well-secured but is rated one notch below the first-lien facility to reflect its junior priority position with respect to the collateral. Fitch's ratings on third-lien bank debt and unsecured debt reflect lower recovery prospects. The third-lien bank term loan is secured equally with $650 million of GT's existing secured bonds that mature in 2011.

Rating concerns include high leverage, low profitability and cash flow, a high cost structure, and weak internal controls that prompted the restatement of results for 2003 and the first nine months of 2004. In addition, GT's pension plans were underfunded by $3.1 billion at the end of 2004. Required contributions appear likely to increase materially in 2005 and 2006, further limiting GT's financial flexibility. In the near term, liquidity concerns will be partly offset by Goodyear's new bank facilities, which give the company additional time to address its operating challenges and weak operating cash flow by stretching a substantial portion of debt maturities out to 2010. The ratings also incorporate Goodyear's well-recognized brand name, its position as one of the three largest global tire companies, and progress in addressing its debt structure and operating performance.

Goodyear made substantial progress in 2004 regarding new product introductions, the reduction of excess costs, and rebuilding its dealer relationships. However, its key North American Tire segment, while having reversed earlier losses, continues to be faced with low margins and a very competitive environment. Goodyear's cash flow remains insufficient to support capital expenditures, increases in pension contributions, and debt maturities. An important consideration in the ratings going forward will be the company's ability to rebuild long-term operating results in its North American operations. Goodyear will also be challenged to recoup potential double-digit price increases in key raw materials in 2005.

Over the near term, Goodyear faces sharply escalating required pension contributions. The company's underfunded position and the heavy level of pension benefit payments being paid out of pension assets expose the company to the possibility of even higher contributions in the event of asset underperformance. Current pension legislation proposals, if enacted, would significantly boost Goodyear's required contribution levels, placing additional claims on the company and further deteriorating the company's financial profile.

In 2004, tire unit sales increased by 1.6%, excluding the impact of FIN 46 consolidations in which GT consolidated two existing investments in South Pacific Tyres and T&WA. Segment profit doubled, however, as a result of an improved replacement tire market, higher selling prices, benefits from previous restructuring, strong acceptance of new products, and the favorable impact from foreign currency translation. The North American Tire segment eliminated the losses it had recorded in the previous two years but margins remained weak at less than 1% of sales. The segment suffers from a high cost structure due in part to GT's high labor costs, a manufacturing footprint that is more concentrated in the U.S. than its competitors, and costs related to retiree pensions and other postretirement benefits. As a result, GT's North American production capacity is likely to remain more costly compared to its chief rivals.

GT has been more selective about the market segments in which it invests, contributing to an improved product mix across much of the company. This strategy, however, may also contribute to additional costs as GT reallocates production capacity, especially as the original equipment market is being negatively affected by weakness in the automotive sector. This concern is somewhat offset by relatively stronger performance in the replacement tire market, which tends to be less cyclical and usually provides higher margins. In order to rationalize its operations and reduce overcapacity, GT incurred net charges of $56 million in 2004 and $292 million in 2003. In 2004, GT realized savings of $9 million from the 2004 program and $184 million from the 2003 program. The company expects to realize additional savings of $110 million annually from the 2004 program. However, margins continue to be pressured by raw material and transportation costs despite several price increases implemented by GT during 2004.

In 2004, net cash flow from operating activities increased to $837 million, including the effect of increased working capital requirements related to higher revenue. The pace of further improvement is uncertain, in Fitch's view, given the still considerable challenges facing GT such as the weak OE market, raw material prices, and operating issues already mentioned. While there may be some upside potential for profitability and cash flow from operations, quarterly segment performance indicates that operating profit was fairly stable after a meaningful step-up in the second quarter of 2004. This trend suggests that future performance may improve only modestly in the absence of markedly stronger demand or significant improvements in GT's productivity.

Cash requirements in 2005 total approximately $1.4 billion, as estimated by Fitch, which exceeds excess cash flow of $837 million in 2004. As a result, GT may need to rely on additional debt or equity issuance to offset a potential cash flow deficit after considering any operating gains or other sources of cash in 2005 such as asset sales. Cash requirements include $640 million for capital expenditures planned by GT, $240 million of incremental pension contributions compared to 2004, and $542 million of debt maturities. Fitch believes other expenditures are likely to be relatively stable, including asbestos settlements and cash payments for the Entran II settlement. Working capital used $213 million of cash in 2004 and could be a use of cash again in 2005 depending on revenue growth, raw material costs, and product pricing. Cash flow could be supplemented by the pending divestitures of GT's North American Farm tire business for $100 million and its rubber plantation in Indonesia for $65 million.

Availability under Goodyear's various credit agreements at the end of 2004 totaled approximately $1.1 billion, including $620 million available domestically (U.S. and Canada) and $496 million available overseas. Additional liquidity was provided by cash balances of $2 billion, split about equally between the U.S. and foreign locations.

These ratings are based on existing public information and are provided as a service to investors.