Fitch Revises Goodyear's Outlook to Stable from Negative; Affirms IDR at 'B+'

NEW YORK--Fitch Ratings has revised The Goodyear Tire & Rubber Company's (GT) and Goodyear Dunlop Tires Europe B.V.'s (GDTE) Rating Outlook to Stable from Negative. In addition, Fitch has affirmed GT's Issuer Default Rating (IDR) and debt as follows:

--IDR at 'B+';

--$1.5 billion first lien credit facility at 'BB+/RR1';

--$1.2 billion second lien term loan at 'BB+/RR1';

--Senior unsecured debt at 'B/RR5'.

GDTE

--EUR505 million European secured credit facilities at 'BB+/RR1'.

The ratings cover approximately $4.5 billion of outstanding debt as of Dec. 31, 2009.

Fitch also expects to assign a rating of 'B/RR5' to GT's new 8.75% senior unsecured notes due in 2020 that are part of a pending exchange offer.

The Outlook revision is based on GT's debt reduction ($1.4 billion) in the fourth quarter 2009 (4Q'09), ended Dec. 31, 2009, Fitch's assessment that the downside risk to the company has moderated with improving end-markets, and an improved maturity schedule because of the pending debt exchange of $650 million 2011 notes for 2020 notes. Fitch expects GT's profitability will improve in 2010, but free cash flow will likely be negative. Even though Fitch has stabilized the Outlook, other credit concerns remain including weak free cash flow, the underfunded pension position, high leverage, rising raw material costs in the second half of the year, relatively low margins, Venezuelan operating costs and risks, and unprofitable North American operations. The company's adequate liquidity position, cost reduction actions, global diversification and competitive new products support the company's ratings.

GT reduced its debt by $1.4 billion in the fourth quarter by repaying $500 million of bonds that were due in December and fully repaying $800 million that had been drawn on its domestic bank revolver. Combined with strong fourth-quarter EBITDA performance compared to last year driven by global volume gains, positive price/mix, cost savings and favorable currency, GT's debt-to-EBITDA ratio decreased to 5.3 times (x) at 2009 year end from 11.6x in its third quarter.

At the beginning of February GT announced plans to exchange all of its $650 million 7.857% unsecured notes due 2011 for 8.75% notes due in 2020 in order to extend debt maturities. The company may issue up to $702 million of the new senior unsecured 8.75% notes that will be guaranteed on a senior unsecured basis by certain GT subsidiaries; the old notes are not guaranteed by any GT subsidiary. The offer and consent solicitation expire March 2, 2010. GT has no bonds maturing in 2010, and if the company completes this exchange it will have $325 million of remaining bonds due in 2011. GT's European and Domestic bank revolvers expire 2012 and 2013, respectively, followed by its $1.2 billion second-lien bank term loan that matures in 2014. GDTE's EUR450 million pan-European accounts receivable securitization facility expires in 2015. Also in 2015, GT has a $260 million bond maturity followed by 2016 when $960 million of bonds that were issued in May 2009 mature.

GT ended 2009 with a strong cash and liquidity position. Fitch calculates GT had a liquidity position of approximately $3.2 billion, consisting of $1.9 billion of cash and equivalents (including $370 million of cash in Venezuela) and $1.6 billion in aggregate domestic and European available revolvers, less $224 million of short-term debt and $114 million of current maturities of long-term debt. This represents a liquidity improvement of $1.324 billion from GT's 2008 year end. GT has commented that it needs about $1 billion of cash to meet working capital needs and overseas funding requirements through its operating cycle. Much of GT's cash holdings (55%) are outside the United States. GT's $1.5 billion U.S. bank revolver is subject to a borrowing base which decreased the availability of the facility by $114 million at year-end 2009. The facility also had $494 million of letters of credit (LOCs) against it at year end, which cannot exceed $800 million. The domestic facility could become subject to an interest coverage covenant (2.0x) if the sum of the company's domestic cash and availability under the revolving facility are less than $150 million. GDTE's EUR505 million first-lien credit facility due 2012 is fully available less $14 million of LOCs against it. This facility is subject to a covenant that requires GDTE's consolidated Net Debt (net of cash and certain availability under the U.S. revolver) to Consolidated EBITDA not to exceed 3.0x.

Fitch estimates that GT will have negative free cash flow in 2010 due to increased capital expenditures, material pension contributions, and working capital usage as the company rebuilds its inventory. Capital expenditures are likely to be in the range of $1 billion to $1.1 billion up from $746 million in 2009. The increase is related to GT's efforts to support low-cost manufacturing including the construction of a new plant in China and expansion of a facility in Chile. Working capital is expected to increase at least $200 million after the company reduced its inventory by $1.1 billion last year. Additional cash uses in 2010 include cash interest expense between $350 million-375 million and cash charges related to restructuring which Fitch estimates at over $100 million.

Pension contributions will continue to be a significant use of cash at GT in 2010 and beyond. GT's global pension funds remain deeply underfunded ($2.55 billion underfunded in 2009 versus $2.75 billion underfunded in 2008, or 63.9% funded at the end of 2009 compared to 57.6% in 2008). GT contributed $371 million to its global pension plans in 2009, but this amount would have been greater without short-term funding relief provided by the IRS. GT estimates that pension contributions in 2010 will be in the $275 million to $325 million range, but that 2011 contributions could spike to as much as $575 million absent additional pension relief legislation in the U.S.

Last year Venezuela contributed a significant portion of Latin America Tire's sales and operating income. The devaluation of the bolivar fuerte and weak economic conditions are expected to adversely impact Latin American Tire's operating results in 2010 by $50 million to $75 million as compared to 2009. Venezuelan currency fluctuations going forward are reported in earnings effective January 2010 due to highly inflationary accounting now required for the country. As a result, GT is expected to take a $150 million charge in its current quarter related to the re-measurement of its balance sheet, net of tax.

For the 4Q'09, GT's revenue increased 7.3% from the prior year period reflecting improved global volume gains and favorable currency translation. Unit volumes increased 7.8% or 3.1 million units in the period. The company had segment operating income of $249 million in 4Q'09 compared to a loss of $159 million in the year-ago quarter. The 2009 quarter benefited from $358 million in lower raw material costs. GT's 2009 full-year revenue decreased 16.3% or $3.2 billion to $16.3 billion compared to 2008 primarily as a result of tire unit volumes declining 9.5% in the period and a reduction in sales in other tire-related business. Segment operating income was $372 million compared to $804 million in 2008. This reflects weak industry demand, increased under-absorbed fixed costs and reduced operating income from other tire-related businesses. Improved price/mix and lower raw material costs had a favorable impact on segment operating income in 2009. Fitch calculates that GT's EBITDA margin in 2009 was 5.3%.

Fitch's forecasts for GT assume higher revenues and modestly higher margins in 2010. Benefits of GT's cost-reduction programs should help offset expected raw materials pressures in the second half of this year. GT has announced a new $1 billion cost-saving target between 2010 and 2012 mainly driven by reduction of high-cost capacity, lower unabsorbed fixed costs and increased low-cost sourcing after completing a four-year $2.5 billion four-point cost savings program in 2009. However, higher EBITDA in 2010 will likely be less than interest payments and capital expenditures, and GT will not benefit in 2010 from the significant working capital source of cash that it achieved in 2009.

The 'RR1' recovery ratings for GT's first-lien and second-lien bank debt reflect Fitch's expectation of substantial recovery in a distressed scenario (91% to 100%), supporting higher ratings relative to the IDRs. GT's unsecured debt has been assigned an 'RR5' representing 11% to 30% recovery in a distressed scenario. Collateral for GT's domestic first-lien and second-lien bank facilities includes U.S. and Canadian trade receivables, inventory, mortgages on U.S. headquarters and certain manufacturing facilities, GT's trademark, the pledge of domestic and 65% of certain foreign subsidiary stock (except GDTE), and substantially all other assets. The GDTE senior secured credit facilities are secured by virtually all assets of GDTE and its subsidiaries in the United Kingdom, Luxembourg, France and Germany, plus the stock of GDTE's principal subsidiaries. Collateral excludes accounts receivable used in the EUR450 million Pan-European receivables facility or other securitization programs.

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