The Goodyear Tire & Rubber Co. is turning to institutional lenders for a $500 million synthetic letter of credit facility that will replace its maturing $680 million revolver, currently held by banks. "They are more likely to get commitments of the amount they need to get the facility in place than if they used a traditional bank revolver," stated Martin King, an analyst with Standard & Poor's. "There is some concern about the company and their credit quality and earnings and cash flow."
"It moves along with the strategy we have going forward on the debt--to extend it and reduce it," a Goodyear spokesman responded.
Institutional investors do not have the same capital allocation requirements as banks and so the synthetic L/C structure will broaden the potential pool of investors. Banks are less interested in doing revolvers because they have to allocate some of their capital to cover potential use, King said. The amount set aside depends on the credit strength of the company and a weak company becomes fairly expensive. Goodyear's bank loan is rated B+ and performance has deteriorated sharply in the past few years, caused by overcapacity and weak demand. Other factors include increased competition from foreign manufacturers and high medical, pension, energy and raw-material costs.
Kevin Tynan, an analyst with Argus Research, believes the worst is over. "Fundamentally and operationally the company is starting to improve. If they do this it would give them a modicum more of financial stability, which is what the Street is looking for," he said. Tynan believes Goodyear may be trying to get away from the revolver to drive its credit rating towards investment grade. Even if not much is exercised on the revolver, without it they have a better chance of getting their credit back to where they can issue debt at a lower rate in the future, he said.
J.P. Morgan and BNP Paribas are leading the deal, which offers drawn pricing of LIBOR plus 4 1/2%. "It's not a cheap facility," King noted. "The revolver matures early next year so they had to refinance that and I think it's prudent for them to do that well in advance of the actual maturity date," King said. A J.P. Morgan spokesman declined comment and BNP Paribas bankers did not return calls. --A.C.