Goodyear Tire & Rubber
The US corporate showed how the secured lending market can provide liquidity when the high-yield market will not
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Damon Audia, |
GOODYEAR TIRE & RUBBER was in a lot of trouble in late 2003. The global tyre manufacturer had been downgraded to junk, its US operating business was struggling, it had a lot of debt maturities coming due, presenting short-term liquidity issues, and pension liabilities weighed heavily. Furthermore, all the company’s debt was sitting in North America when it’s operations are worldwide. Goodyear’s capital structure reworking over the past 18 months has led to some solidly successful and innovative borrowing by the company, and it has also helped to make the concurrent turnround of the operating company a success.
“In 2003 we embarked on a plan which would allow us to first improve our liquidity and subsequently extend our maturities, giving us time to turn the operating business around,” says Goodyear’s senior vice-president and treasurer, Darren Wells, who in May was also promoted to oversee business development. “It has been a critical element in the turnaround of the company in which all levels of management were involved.” The results speak for themselves. On March 16 the company posted its first full-year profit since 2000.
Goodyear issued a $350 million 4% 30-year convertible last July and a brand new €275 million pan-European accounts receivable securitization facility for Goodyear Dunlop Tires Europe last December. “We think the European account receivable deal was an unprecedented transaction and helped us to bring together different collateral pools from countries with different legal structures when we came back to the European market,” says Wells.
Yet the company’s most impressive achievement came with its $3.65 million bank financing this April. “To execute a transaction this big and this complicated was certainly a huge challenge,” says Damon Audia, assistant treasurer at Goodyear. This was a $1.5 billion asset-based revolving credit facility, due 2010; and a second-lien loan, also due 2010, that at $1.2 billion was the biggest ever raised by a company. There was also a 2010 revolving credit facility equivalent to $650 million for the company’s affiliate in Europe, Goodyear Dunlop Tires Europe.
“The 144A high-yield bond market was closed to us because we didn’t have current financials,” says Wells. “But we had very good advice from our bank lenders and we’ve had a constant dialogue with our new investor base, the high-yield loan and bond investors, which made this loan financing a success.”
Demand was so great that the company decided to issue a $300 million third-lien loan as well. “The plan had been to go to the bond market later in the year to refinance some existing bond maturities when they had their financials, but together we decided to take advantage of the robust loan market conditions at the time and do a third-lien loan instead,” says Tom Maloney, managing director in the automotive group at Deutsche Bank, which was joint bookrunner on the second-lien and third-lien loans.
The $3.65 million financing cleaned up Goodyear’s capital structure by securing all the new loans to one collateral pool and taking first-, second- and third-lien tranches off this. It also reduced the company’s cost of borrowing. The most expensive tranche, the third-lien loan, yields 3.5% over Libor; on the credit facilities the new loans replace, the yield on the most senior loan was 4%.
The covenants on the new loans give Goodyear the room to make $700 million of capital expenditures instead of $500 million under the old agreements.
Maloney at Deutsche says Goodyear’s success shows that, when the unsecured bond market is unwilling to advance more cash to companies with large pension obligations, there’s still liquidity in the secured lending market to support them. Secured loan investors are ranked higher than a company’s OPEB pension obligations in the event of bankruptcy, unlike unsecured bondholders.
As for Goodyear, Wells says it will continue to tap markets opportunistically. “In the long term, we want to reduce our leverage through asset sales and the issuance of additional equity.”
The company still has to address its underfunded pension liabilities, into which its will have to pay $400 million in 2005, and some other upcoming bond maturities.
