American Tire Distributors, In-Court LME

Welcome to the 142nd Pari Passu newsletter.

Super exciting writeup today! In recent years, Liability Management Exercises have become more and more common, with companies preferring a delay to Chapter 11 bankruptcy by any means possible. This desire to delay bankruptcy has led to an increasingly contentious legal landscape between creditors, as groups will look to exploit their credit docs in any way possible to maximize their own recoveries.

Despite this evolving landscape, one thing has remained fairly constant: the presence of LMEs and contentious transactions have occurred in an out-of-court setting. In Chapter 11 bankruptcies, while contention will exist between different creditor groups, holders of debt within a single creditor class typically work together to maximize that class’s recovery. The case of American Tire Distributors provides insight and precedent of a new wave of legal exploitation with regard to DIP financing. Today, we will look at one of the more ‘underlooked’ cases of 2024/2025, and discuss the implications of ATD's ruling on the bankruptcy landscape.

Landing high-value bankruptcy intel 7 days before the competition

9fin is the AI-powered data and analytics platform that enables finance professionals to analyze a credit, or win a mandate, in one place. We have our finger on the pulse when it comes to distressed and restructuring – with a global team of specialized journalists and analysts to capture nuances other outlets can't.

A great example is our coverage of Del Monte — on 24 June, 9fin was first to report that Del Monte was planning to file for bankruptcy, exactly 7 days before they officially filed on 1 July.

Del Monte’s filing raises questions that may usher us into a new era of LME strategy and litigation. What happens when a company settles LME litigation and then files for bankruptcy within 90 days? Will the court determine that that settlement is valid, or is it a preference claim that can be clawed back? And if so, can this too be gamified?

In this analysis, 9fin's resident LME expert Jane Komsky analyzes the legal precedent, potential defenses, and worst-case scenarios.

Company Overview

American Tire Distributors (ATD) (formerly known as Heafner Tire) was founded in 1935 in North Carolina. Starting off as a single tire mold recapper (process of putting new tread rubber onto a worn tire) and a gas station. From its beginnings, ATD has grown into the largest independent supplier of tires to the tire replacement market, primarily via acquisitions. This scale was achieved through three main acquisitions: Beach Tire Mart, Commonwealth Tire, and Oliver & Winston in 1985, 1991, and 1997, respectively. These brands were brought under the then Heafner Tire Brand, which allowed the company to expand from 1 to 135 locations across the United States. In 2002, Heafner Tire rebranded as American Tire Distributors, and over the following two decades, engaged in several acquisitions that solidified its position as the leading North American independent supplier of tires [1],[2].

Getting into ATD’s business model, the company operates a wholesale distribution model designed to bridge the logistical and operational gap between tire manufacturers and the highly fragmented retail tire market in North America. Its core business involves purchasing large quantities of tires, wheels, and related automotive accessories from top global producers - such as Michelin, Continental, and Hankook - as well as manufacturing and selling its own proprietary and exclusive brands like Hercules and Ironman. These products are stored in over 115 distribution centers across the U.S., enabling ATD to offer same-day or next-day delivery to more than 80,000 customers, including local tire shops, national retailers, dealerships, and e-commerce platforms. The company enhances its business model with other product offerings, such as a digital infrastructure called ATDOnline that gives its customers information on pricing, order, and tracking, as well as franchising programs via Tire Pros, which allows tire retailers to receive advertising and marketing support by being promoted by ATD [1],[2].

A key part of ATD’s value proposition lies in managing the logistical complexity associated with distributing tires. A single tire type is defined by a Stock-Keeping Unit (SKU), which uniquely identifies it based on dimensions, performance characteristics, seasonal application, vehicle compatibility, and brand. Because modern vehicles require increasingly specialized tires, the number of active SKUs in the replacement tire market exceeds 50,000. Most independent retailers cannot afford to hold deep inventory across such a broad SKU range due to space, capital, and risk constraints (a typical retailer will hold 100-1000 SKUs at any given time, depending on size). ATD solves this problem by centralizing inventory, optimizing routing and storage through its logistics network, and fulfilling retailer orders on short notice -enabling retailers to operate leanly while still meeting customer needs [1],[2].

The need for a distributor like ATD exists because tire manufacturers are not structured to service such a fragmented, low-volume, geographically dispersed retail network. Selling directly to tens of thousands of small retailers would require manufacturers to build extensive logistics infrastructure, expand sales and support staff, assume credit risk, and maintain inventory near every point of demand - none of which aligns with their core focus on production and brand development. 

The importance of ATD in the tire replacement industry led to significant investment in the company over the past few decades, with its largest transaction being a take-private deal by TPG in 2010. TPG purchased approximately 93% of ATD for $1.3bn (specific details regarding debt financing were not publicly disclosed). TPG initially looked to achieve a return on this acquisition in 2014 via an IPO of ATD, but this plan was ultimately discarded as TPG ended up selling 46% (approximately half) of its ownership stake in ATD to Ares for approximately $620mm in February 2015 [1],[2].

Despite these investments, however, ATD began to struggle following Ares’s investment in the company.  The most immediate reason for ATD’s operational downturn post-2015 was the abrupt termination of supply relationships with two of ATD’s largest tire manufacturers: Bridgestone Americas, Inc. and Goodyear Tire & Rubber Company. In 2018, these manufacturers launched a joint distribution venture - TireHub, LLC - that would sell directly to tire retailers, bypassing third-party distributors like ATD. By mid-2018, both Bridgestone and Goodyear had ceased supplying ATD altogether. These two suppliers represented approximately 25% of ATD’s total annual unit volume in 2017, or around 9 million units, which created an immediate and severe disruption to ATD’s inventory, revenue stream, and customer fulfillment capabilities. Importantly, ATD was unable to self-produce to meet this deficit because it did not have the infrastructure in place to do so. Additionally, the company struggled to find new suppliers due to industry-wide changes (discussed in the next paragraph). The loss of high-margin, high-volume flag brand tires had downstream effects on customer loyalty, pricing power, and borrowing base collateral, since much of ATD’s ABL (asset-based lending) facility was tied to inventory and receivables [1],[2].

This disruption occurred against a backdrop of broader structural change within the tire distribution industry, primarily driven by disintermediation. More manufacturers were forming joint ventures or in-house distribution arms to exert tighter control over the retail channel and improve margin capture. Additionally, digital-first players like Amazon had begun offering consumers the ability to purchase tires online with coordinated in-store installation, appealing to convenience-oriented buyers and eroding the traditional wholesale-retail pipeline in which ATD operated. These changes increased competition, depressed pricing, and accelerated the shift to omnichannel retail, making ATD’s legacy distribution model increasingly vulnerable.

The two reasons aforementioned led the company to file for its first bankruptcy in 2018 (not to be mistaken with the 2024 bankruptcy which will be the focus of this paper). Prior to ATD’s filing, the company attempted to engage in operational cost savings by a re-examination of its procurement processes, which was estimated to save $30-$35mm annually, as well as a re-evaluation of its workforce, which was anticipated to save $6mm annually. However, these savings did not prove to be enough. In 2018, ATD hired Kirkland & Ellis as Legal Advisors, Moelis as financial advisors, and AlixPartners as restructuring advisors.

Ultimately, the company filed for Chapter 11 bankruptcy with over $2.5bn in debt. The company's capital structure can be seen in the image below.

Now, while we do not want to spend too much time analyzing the 2018 bankruptcy, we will go over the broad structure of the plan to give an understanding of what the capital structure looked like going into 2024. A key component of the 2018 bankruptcy was the DIP facility. Specifically, the DIP facility provided for $1.23bn in total financing. This included $980mm under an ABL DIP facility and $250mm in a First-in Last-Out (FILO) DIP Facility. Of the $1.23bn of total financing, $639mm of the capital was rolled-up from the outstanding amount under the pre-petition ABL facility (i.e, $591mm of new money was provided). This implies that for every dollar of new money that was provided, approximately $1.08 was rolled up (keep this in mind for our discussion of the 2024 DIP facility, where we will see very different terms present). The 2018 restructuring saw the debt decrease from $2.384bn to $695mm (or by $1.689bn).

• DIP Facility - Repayment in Cash

• Term Loan Facility - Reinstatement of $695mm of pre-petition debt

• Senior Subordinated Notes: Pro Rata share of 95% of common equity

• Sponsors (TPG and Ares): Pro rata share of 5% of common equity

As seen above, the 2018 restructuring was structured around the equitization of the Senior Subordinated Notes. When ATD filed for bankruptcy, it filed the above plan as a Restructuring Support Agreement (meaning it had already negotiated the terms of the bankruptcy in advance of its filing date). As a result of this and the overall simplicity of the plan (just featuring an equitization), ATD was able to exit bankruptcy in just 2 months.

Causes of 2024 Bankruptcy

As we have stated, the company once more filed for Chapter 11 bankruptcy in 2024. The question becomes: what has happened since 2018?

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