Cash Management

Money Fund Problems Deflate Goodyear

Redemption delays for its Reserve Primary money-market deposits lead it to draw down $600m for working-cap, other liquidity needs.
Stephen TaubSeptember 25, 2008

Goodyear Tire & Rubber Co. said that redemption delays from $360 million of money-market deposits in the Reserve Primary fund are forcing Goodyear to draw funds from its U.S. revolving credit facility.

The $600 million draw-down will be used to support seasonal working capital needs and to enhance the company’s cash liquidity position, the tire maker said. It noted that the Reserve Primary Fund, which recently rocked the markets and confidence when it “broke the buck,” has delayed payment of requested redemptions under a Securities and Exchange Commission order that allows an orderly disposition of its securities. This action was the catalyst for the company’s decision to draw the facility at this time, Goodyear explained.

“The SEC granted The Reserve Fund’s application to suspend all rights of redemption from the Primary Fund solely to protect all shareholders in the funds during the redemption process,” Reserve Management spokeswoman Ming Lee Hatch told the Associated Press in an E-mail. “Unprecedented market conditions have created an illiquid market for many securities in the Fund as well as an unprecedented number of requests for liquidation. Any attempt to sell these securities to meet large redemption requests would result in sales at a loss, thereby affecting the Fund’s net asset values.”

Goodyear said that its other U.S. cash investments remain fully accessible by the company.

Other companies, including Legg Mason Inc., also have had problems with their money-market fund deposits. But in one case, Pacific Gas & Electric Corp. CFO Chris Johns has said that it had the “good fortune” to spot vulnerabilites in the Reserve Primary Fund associated with the now-bankrupt Lehman Brothers and “we pulled out before the issues” hit at Reserve Primary.

Goodyear also said in the same news release that the 30-day appeal period for a U.S. District Court order, approving the settlement agreement establishing the Voluntary Employees’ Beneficiary Association trust (VEBA), had expired without an appeal being filed. The VEBA trust will provide healthcare benefits to the company’s current and future United Steelworkers (USW) retirees, it said. As a result, Goodyear now can remove liabilities for USW union retiree healthcare benefits from its balance sheet.

As of year-end 2007, these liabilities were about $1.2 billion. The company fully funded the $1 billion VEBA following the court’s Aug. 22 settlement approval. At the end of the second quarter, Goodyear reported a global cash balance of about $2.1 billion prior to funding the VEBA.