American credit market outlook

The turnaround at Goodyear Tire & Rubber Co continues, but credit investors can't get over the fact that the largest US tiremaker is partly reliant on the ailing US automakers. Goodyear's perceived credit quality weakened in the credit default swap and junk bond markets on Friday, as investors ignored the company's improving operating performance and punished it for being an auto supplier, traders said.
The company has made great strides in getting its house in order in recent years, but it might be too soon to buy the credit.
Goodyear has improved its relations with dealers, which are key to tire sales, and revenues and gross margins are rising, said Shelly Lombard, an analyst at independent credit research firm Gimme Credit.
The company has easily refinanced $4 billion of debt this year, including a $400 million senior note sale this week.
But Goodyear still has problems, like its rising pension costs, and future progress could be slower, Lombard added.
"You get the low-hanging fruit first, then it gets harder," she said.
Goodyear's bonds may not have much upside for the time being because the company must keep making improvements and the hurdles are likely getting tougher to clear, Lombard said.
By the same token, the credit may also not have much downside. Some investors shorted Goodyear's credit on Friday on renewed fears of greater trauma ahead for the auto industry, which accounts for about 30 percent of Goodyear's tire sales, a trader said.
But the other 70 percent of Goodyear's sales come from consumers buying replacement tires for their cars, which is more profitable and less cyclical than direct sales to the automakers, another trader said.
"We are less an auto supplier than most analysts consider us," Goodyear spokesman Keith Price said. "Analysts understand our business but most of them cover other auto suppliers, not consumer products companies."
The cost of protecting Goodyear debt against default was quoted up at least 20 basis points to about 470 basis points, which translates to $470,000 per year for every $10 million of principle protected.
The market for Goodyear CDS has grown relatively illiquid lately, which may be a sign investors see the credit in somewhat of a holding pattern, an analyst said.