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Rating Action:

MOODY'S ASSIGNS B2 RATING FOR THE PROPOSED NEW GTD. SR. UNSEC. NOTES OF HLI OPERATING CO. (A HAYES LEMMERZ SUB.); DOWNGRADES EXISTING RATINGS (TO B2 GTD. SR. UNSEC.; B1 GTD. SR. SEC); OUTLOOK STABLE

10 Mar 2005
MOODY'S ASSIGNS B2 RATING FOR THE PROPOSED NEW GTD. SR. UNSEC. NOTES OF HLI OPERATING CO. (A HAYES LEMMERZ SUB.); DOWNGRADES EXISTING RATINGS (TO B2 GTD. SR. UNSEC.; B1 GTD. SR. SEC); OUTLOOK STABLE

Approximately $850 Million Of Debt Obligations Affected

New York, March 10, 2005 -- Moody's Investors Service assigned a B2 rating for the proposed new guaranteed senior unsecured notes of HLI Operating Company, Inc. ("HLI Opco"), an indirect subsidiary of Hayes Lemmerz International, Inc. Half of the net proceeds of the proposed notes will be applied to prepay existing senior secured term loans, with the other half to be used to either augment cash or repay outstanding revolver debt or accounts receivable securitization usage.

Moody's additionally downgraded all of the existing ratings for HLI Opco in response to Hayes Lemmerz's weaker-than-anticipated consolidated free cash flow performance since its June 2003 reorganization out of Chapter 11 bankruptcy. Hayes Lemmerz will likely once again realize negative free cash flow generation during the fiscal year ending January 31, 2006 and will therefore have to rely on either its balance sheet cash or liquidity facilities in order to finance a portion of its cash interest obligations during this period.

The outlook for HLI Opco's ratings is stable after incorporating Moody's actions above.

The following specific rating actions were taken by Moody's:

- Assignment of a B2 rating for HLI Operating Company, Inc.'s proposed Euro 120 million guaranteed senior unsecured notes maturing 2012, to be issued under Rule 144A with registration rights;

- Downgrade to B2, from B1, of the rating for HLI Operating Company, Inc.'s $162.5 million remaining balance of 10.5% guaranteed senior unsecured notes maturing June 2010 (the original issue amount of $250 million was reduced as a result of an equity clawback executed in conjunction with Hayes Lemmerz's February 2004 initial public equity offering);

- Downgrade to B1, from Ba3, of the ratings for HLI Operating Company, Inc.'s approximately $527 million of remaining guaranteed senior secured bank credit facilities, consisting of:

- $100 million guaranteed senior secured bank revolving credit facility due June 2008;

- $450 million ($427.3 million remaining) guaranteed senior secured bank term loan facility due June 2009 (which term loan will be prepaid by approximately $73 million through application of about half of the net proceeds from the proposed notes offering);

- Downgrade to B1, from Ba3, of the senior implied rating;

- Downgrade to B3, from B1, of the senior unsecured issuer rating, which rating does not presume the existence of subsidiary guarantees

Hayes Lemmerz additionally entered into a three-year $75 million domestic accounts receivable securitization agreement during December 2004. The company is presently negotiating the terms of a $25 million foreign accounts receivable securitization agreement. These unrated off-balance sheet agreements will offset the impact of canceled OEM early pay arrangements (which discounted an average of approximately $35 million of accounts receivable) and also provide some incremental liquidity. A November 2004 amendment to the senior secured credit agreement was executed in order to permit these transactions. Usage under the securitization agreements is not captured as debt for financial covenant purposes.

The new rating assignments and rating downgrades reflect Hayes Lemmerz's negligible debt reduction from operating cash flows to date, Moody's expectation that EBIT interest coverage will fall below 1.0x during the fiscal period ending January 2006, and the potential for total debt/EBITDAR leverage to gradually increase from above 3.5x pro forma for the transactions to more than 4.0x should performance fall short of management's base case projections. This leverage ratio captures off-balance sheet obligations for the present value of leases, letters of credit, and accounts receivable securitizations as debt. As a capital-intensive original equipment supplier with end customer exposure to the Big 3 manufacturers globally approximating 45%, Hayes Lemmerz is highly vulnerable to weakened production schedules. Hayes Lemmerz is additionally a major user of various grades of steel, iron, and gas. Moody's believes that the company will realize less-than-full recovery of commodity price increases despite various steps to negotiate customer price increases, maximize recovery from its own scrap, and reduce its cost structure. Hayes Lemmerz's North American operations including Mexico are undergoing an expansion program that is requiring substantial up-front capital investment in low pressure aluminum die casting equipment along with consolidation expenses to eliminate high-cost excess capacity. Hayes Lemmerz is also investing heavily in expansion within low-cost countries in order to reduce overall production costs and additionally take advantage of significant growth trends within these emerging regions. The success of these efforts is highly critical to the company's realization of future performance goals. Hayes Lemmerz was notably excluded from bidding on many new business opportunities during the period the company was in bankruptcy. Much of the new business being booked entails long lead times and is therefore back-end loaded. The company has a significant goal of realizing annual productivity improvements of 6% or more in order to offset customer price-downs, the impact of higher commodity costs, and other volume and mix factors.

The ratings and stable outlook are supported by the series of steps recently taken by Hayes Lemmerz to improve its liquidity profile. These include the proposed notes offering to be denominated in Euros, the new accounts receivable securitization agreement, and the amendments to the senior secured credit agreement to permit these transactions and to materially loosen financial covenants and improve effective unused liquidity to about $200 million. In the event that Hayes Lemmerz follows through with the contemplated sales of its commercial highway hub and drum business and also closes a $25 million accounts receivable securitization, liquidity would be further improved. The additional liquidity, partially extended maturities, and creation of a natural currency hedge for a portion of the company's loans enhance Hayes Lemmerz's ability to pursue expansion into lower cost countries. Hayes Lemmerz also continues to maintain #1 or #2 market positions within its key segments globally. The company is additionally investing heavily in incremental low-pressure aluminum die cast capacity with the goal of aggressively seeking awards for higher-margin aluminum products such as larger wheels. These less commodity-oriented products face more limited competition from both traditional and new Chinese competitors. Management has indicated that most existing capacity outside of North America is already near full utilization and thereby generating proportionately stronger margins.

Hayes Lemmerz's revenue base is split nearly equally between North America and the rest of the world. This diversification reduces the company's vulnerability to production trends within particular geographic markets. Hayes Lemmerz is also the only global supplier of both steel and aluminum wheels. The company launched more than $375 million of follow-on and conquest business during 2004, and was awarded more than $300 million of gross new business scheduled to launch between 2005 and 2009. Once capacity is further expanded and the company establishes an even more significant presence in lower-cost countries, its new business awards are expected to accelerate at an even faster pace, and its customer base is expected to be further broadened.

Moody's would be likely to lower Hayes Lemmerz's ratings or outlook in the event that liquidity deteriorates meaningfully, the company fails to achieve a turnaround of its North American free cash flow performance, steel and other commodity costs continue to rise and cannot be offset through recovery from customers or other means, new business awards are not realized as necessary to fill incremental capacity, or investment in new capacity exceeds expected levels.

Substantial improvement in Hayes Lemmerz's free cash flow generation driving net debt reduction in excess of $100 million and a reduction in total debt/EBITDAR leverage closer to 3.0x would be the most likely driver of a positive movement in the company's outlook or ratings.

HLI Opco's proposed Euro 120 million of senior unsecured notes due 2012 will be pari passu with its existing 162.5 million of 10.5% guaranteed senior unsecured notes due 2010. These notes will be supported by guarantees from Hayes Lemmerz and from substantially all domestic subsidiaries. The notes will be non-call for four years with the exception of a 35% equity clawback, will contain a change of control provision permitting puts at 101% of principal plus accrued interest, and will have a 30-day grace period for non-payment of interest.

Hayes Lemmerz is the largest worldwide producer of aluminum and steel wheels for the light vehicle market, with an approximately 20% market share in both North America and Europe. The company is also a leading provider of steel wheels for the commercial highway market and a leading supplier in the market for suspension, brake and powertrain components. Annual revenues approximate $2.2 billion.

New York
Andris G. Kalnins
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Lisa B. Matalon
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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