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Rating Action:

MOODY'S ASSIGNS B3 RATING TO VIASYSTEMS INC. 144A SENIOR SUBORDINATED NOTES AND B1 TO ITS CREDIT FACILITIES

28 May 1997
MOODY'S ASSIGNS B3 RATING TO VIASYSTEMS INC. 144A SENIOR SUBORDINATED NOTES AND B1 TO ITS CREDIT FACILITIES New York, 05-28-97 -- Moody's Investors Service assigned a B3 rating to the proposed $300 million senior subordinated notes of Viasystems, Inc. due 2007. At the same time, Moody's assigned a B1 rating to Viasystems' $136 million secured term loans and nearly $250 million senior secured revolving credit facilities. Viasystems, Inc. is a wholly-owned subsidiary of Viasystems Group, and the businesses formerly conducted by Circo Craft, Viasystems Technologies, Forward Group, Interconnection Systems Limited and any of their predecessors. Net proceeds from the sale of the notes will be used to repay various borrowings under senior credit facilities as well as a subordinated note assumed in Viasystems Group's acquisition of Forward Group from an investment partnership controlled by Hicks, Muse, Tate & Furst and Mills & Partners. This is the first time that Moody's has rated the debt of the company.
The B3 rating reflects Viasystems' brief operating history and the challenges arising from the integration of the four recently acquired entities spanning three continents; the intense competition in the contract electronic manufacturing industry; the subordinated rank of the notes and the moderately high total debt outstanding; and the prospect of additional senior debt issuance to facilitate future acquisitions by the company. However, the rating acknowledges the company's leading position as an international non-captive manufacturer of printed circuit boards and backpanel assemblies; the company's proprietary technologies and process methods; a roster of prominent OEM customer relationships; and the favorable prospects for growth in the company's end markets, particularly the telecommunications sector which comprises 63% of Viasystems' customer base.
On a pro forma basis, Viasystems will be highly leveraged with approximately $820 million of debt comprising about 77.9% of total book capitalization. Total debt, in fact, will be nearly equivalent to pro forma 1996 sales. Invested equity will actually total $285 million - $255 million put into the company by the controlling partnership consisting of a $170 common stock interest and $85 million preferred stock, as well as $30 million of preferred stock held by Lucent Technologies as part of the transaction price in its sale of substantially all of the assets of its former Interconnection Technologies Unit to Viasystems Technologies. About $479 million, consisting of borrowings under senior credit facilities as well as obligations incurred in the acquisitions of Forward Group and Interconnection Systems, will rank ahead of the notes. Under the holding company structure, the notes will be structurally as well as contractually subordinated to the obligations of the subsidiaries. In Moody's opinion, the company will have adequate liquidity going forward. The $21 million cash and cash equivalents on hand will be supplemented by about $147 million of additional borrowing capacity for general corporate purposes and working capital, and an additional $75 million available for future acquisitions under the revolving credit facilities.
In analyzing Viasystems' pro forma balance sheet, Moody's is concerned that the company will be heavily leveraged with intangibles of nearly $628 million. Reflecting largely the purchase prices in excess of book value of Forward Group and Interconnection Systems, intangibles will account for nearly half of total assets. There is, however, a compelling rationale for consummating an alignment of manufacturing concerns across continents. The increased demand by multi-national OEMs for a single source of integrated services, accelerating time-to-market and time-to-volume product requirements, and the increased demand for complex and new interconnect technologies may be better served through global geographic positioning and augmented scale.
Moody's believes that the company's strategy is not without risks in this intensely competitive industry. Printed circuit boards serve as the foundation of almost all electronic equipment, providing the circuitry and mounting surfaces necessary to interconnect discrete electronic components, including integrated circuits, capacitors and resistors. Backpanels are used in electronic systems to distribute and ground power, to connect PCBs, power supplies and other elements, and to transfer information into and out of the system. Both devices have heretofore been viewed as commodity products. However, as electronic products have become smaller and more complex, OEMs have demanded increasingly sophisticated engineering and manufacturing expertise to develop more complex multilayer designed PCBs with surface mount and other attachment technologies as well as advanced materials and other engineering specifications. While Viasystems perceives that, by virtue of the size and global sales and marketing network the acquisitions bring, it would be better able to satisfy the local design and production requirements of global OEMs, in this new industry paradigm it will be imperative to execute timely transitions to state-of-the-art processing innovations.
Moody's recognizes that Viasystems' need to provide "one-stop-shopping" for customers' product and service requirements is likely to entail further acquisitions, expressly for establishing a presence in Japan and Southeast Asia which rank among the three most rapidly growing markets for advanced PCBs and backpanels. While the company will rank second in the industry in worldwide sales with 2.8% of the $26.6 billion PCB market, it must contend with competitors such as Hadco which, through its recent acquisition of Zycon with a production facility in Malaysia, is mounting its own global challenge. Any subsequent Viasystems acquisition, financed with a combination of debt and equity, could further extend the company's leveraged capital structure.
Viasystems' pro forma income statement for the year ended December 31, 1996 assumes that all transactions, including the pending merger of Interconnection Systems, currently held by an affiliate of Hicks Muse, had closed as of January 1, 1996. EBITDA of $172.7 million, reflecting a substantial depreciation and amortization of $85.7 million, would have provided 2.3 times interest coverage. Total debt will be a moderately high 4.7 times EBITDA. Although the company has a diversified customer base, on a combined basis its five largest customers accounted for approximately 53% of 1996 sales. Lucent is the company's largest customer, having comprised 35% of 1996 sales. The five-year supply agreement which Viasystems entered with Lucent designates the company as a preferred supplier and requires Lucent to purchase a minimum dollar volume of PCBs and backpanels. However, this arrangement also requires that the company's prices for products sold to Lucent be reduced to an agreed upon benchmark standard by January 1, 1999. The company could be at risk because either party is permitted to undertake a formal study to reset the benchmark based upon a variety of factors, including the prices charged by competitors. This price provision, on top of a January 1, 1997 price reduction on certain products sold to Lucent, could offset savings the company expects to realize from a consolidation of its sixteen manufacturing facilities.
It should be noted that Mills & Partners, the operating managers, has achieved considerable success in consolidating other electronics businesses such as International Wire and Berg Electronics. These companies have accommodated the recent corporate movement of outsourcing non-strategic operations by acquiring and integrating electronics equipment vendors that have formerly existed as captive divisions of larger, vertically integrated electronics concerns. Moody's is concerned, however, that the cumulative responsibilities entailed in the direction of this diverse array of companies could strain the capacity of the operating managers, who are essentially the same individuals.
The securities will be sold without registration under the Securities Act of 1933 pursuant to SEC Rule 144A.
Viasystems Group, headquartered in St. Louis, Missouri, manufactures and markets printed circuit boards and backpanels for telecommunications, computer, automotive, military and other industrial uses.

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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