Investing.com -- Moody’s Ratings has affirmed the B1 corporate family rating and B1-PD probability of default rating for The Goodyear Tire & Rubber Company (NASDAQ: GT ) (Goodyear). The ratings of the company’s senior unsecured notes have also been affirmed at B2 and B3. Concurrently, Moody’s affirmed Goodyear Europe B.V.’s backed senior unsecured notes rating at Ba3. The outlook for both Goodyear and Goodyear Europe B.V. has been revised to stable from negative. Additionally, Goodyear’s Speculative Grade Liquidity rating was upgraded to SGL-2 from SGL-3.

The revision in outlook to stable is indicative of Goodyear’s significant strides in enhancing its segment operating income margin and reducing financial leverage under its ambitious Goodyear Forward initiative that began in Q4 2023. Moody’s adjusted EBIT margin for Goodyear has improved to the mid-4% range from just over 1% in 2023 and its debt-to-EBITDA has decreased to around 4.5x from nearly 7x in 2023. Goodyear also plans to use proceeds from the sale of its chemical business, expected to close in 2025, for further debt repayment.

The affirmation of ratings reflects Moody’s expectation for Goodyear to continue improving margins through increasing cost savings and progress towards generating consistently positive free cash flow in 2026 once Goodyear Forward restructuring outlays are largely completed. EBITDA-to-interest, though still weak for the rating, is expected to steadily strengthen, benefiting from rising earnings and falling debt levels.

Goodyear’s ratings reflect its status as a leading global manufacturer of aftermarket and original equipment tires, underscored by a well-recognized brand name and a leading market share position in North America. Goodyear maintains good scale and is experiencing solid growth in higher margin 18-inch and larger tires, especially in the consumer original equipment business.

The Goodyear Forward strategy, in addition to improving key operating metrics, includes elevating Goodyear’s portfolio of tire brands. Management is committed to expanding coverage in the Tier 1 tire market by providing more higher-margin premium SKUs that will augment Goodyear’s overall value proposition. The company is also selectively exiting lower-margin replacement SKUs, more recently in Asia but with expectations to take place in all regions.

The stable outlook reflects Moody’s expectation for key credit metrics to steadily improve as the majority of targeted $1.5 billion of margin improvement actions are anticipated over the course of this year. Liquidity is expected to remain good even with sizable fluctuations in working capital, supported by a solid cash position (at least $700 million) and significant availability under various revolving credit facilities.

Free cash flow is expected to be negative in 2025 due to restructuring outlays with most actions for Goodyear Forward completed this year. However, free cash flow should be solidly positive in 2026, boosted by cost savings, falling interest expense and lower restructuring outlays.

The ratings could be upgraded with continued improvement in Goodyear’s EBIT margin to a level approaching 7%. Ratings could be downgraded if the EBIT margin fails to sustain the growth generated in 2024, free cash flow doesn’t maintain a trajectory toward breakeven or debt-to-EBITDA moves back above 5x. A downgrade could also arise from a meaningful decline in liquidity, including increased reliance on revolving credit facilities to fund outlays relating to remaining strategic review actions.

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