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Rating Action:

MOODY'S ASSIGNS Baa2 TO MICHELIN PARENT COMPANY AND Baa1 ISSUER RATINGS TO TWO SUBSIDIARIES OF THE MICHELIN GROUP

02 Aug 2001
MOODY'S ASSIGNS Baa2 TO MICHELIN PARENT COMPANY AND Baa1 ISSUER RATINGS TO TWO SUBSIDIARIES OF THE MICHELIN GROUP

First Time Rating

Frankfurt, August 02, 2001 -- Moody's Investors Service today assigned its Baa1 long-term issuer rating and Prime-2 short-term issuer rating to Compagnie Financiere Michelin (Switzerland) and Manufacture Francaise des Pneumatiques Michelin (France) and its Baa2 long-term issuer rating and Prime-2 short-term issuer rating to Compagnie Generale des Etablissements Michelin (France), the parent company. The outlook for the ratings is stable.

The ratings reflects i) Michelin's leading world-wide market positions and technological know-how with significant diversification along product lines and regions, ii) its good quality and tire performance record as well as iii) the group's strong financing arrangements and risk minimization strategies. The family ownership background and the life time appointment and unlimited liability of its managing partners ensure long term orientation and the continued strong focus on managing operating risks conservatively. However, the rating also recognizes i) the competitive industry environment with significant price pressures and the continued need to improve efficiency, ii) the exposure to the depressed truck market, which has been a significant profit contributor to the Michelin group's results and iii) the steady increase in leverage reflecting significant investments and organic growth over the past three years. As capital increases are not the preferred financing alternative, the group will have to use a measured approach to growth and rely on a mix of cash flow retention and external debt to maintain its own gearing target of 1.0 to 1.3 times (net debt/equity). The rating does not include major debt financed acquisitions reflecting Michelin's focused tire strategy, the level of consolidation in the tire industry as well as potential anti-trust issues and the company's own return requirements.

Michelin commands leading or strong positions in most of the relevant tire markets (except Japan) including Europe, North America and South America and offers a full product range from passenger to truck and speciality tires (agricultural, earthmovers, aviation, two wheelers). Despite its exclusive focus on tires the group benefits from geographical diversification as well as the dual end market structure of OEM automotive and replacement. The effect of cyclical developments in the OEM automotive industry is mitigated by its relatively small share in the overall tire market (roughly 25%) as well as the typically lower profitability of this segment reflecting the strong purchasing power of the OEMs. Replacement markets, on the other hand, provide moderate, but fairly stable growth opportunities (average of 2-3% p.a.) and higher margins, which relate to the less dominant customer structure and the higher service element in the truck market. Nonetheless, in the near term a continued economic weakening will most likely affect OEM as well as replacement markets, in particular the truck segment and result in margin pressures and lower profitability.

Moody's expects that Michelin will continue its marketing efforts to improve its positioning in the higher value-added segments of the passenger markets. Michelin's leading brand equity and world-wide brand recognition as well as the high loyalty - and customer satisfaction rate should support the initiative. The company's strong organic growth rates give evidence of the improved marketing concept implemented over the last three years. In the truck market, the higher service-orientation fosters long-term customer relations and loyalty. Nonetheless, Moody's anticipates that Michelin will need to vigorously defend its leading positioning against competitors in the European markets and will at the same time face significant obstacles and competitive pressures to increase market share especially in the North American truck market.

Moody's considers Michelin's strong focus and commitment on maintaining technology and quality leadership as one of its key strengths. The competitive advantage, which has further increased in importance since the latest tire recalls, is evidenced by Michelin's good tire track record and the large number of innovations developed by Michelin over the years (including the new PAX systems). In view of rising product liability and warranty claims Moody's expects Michelin to continue its comprehensive quality assurance programs to avoid problems in the first place, and its diligent problem detection process, which should contain and minimize exposure once problems arise (e.g. through early recalls). In this respect, the long term management structure and personal liability of partners give extra comfort that policies will be rigorously implemented.

After significant capital expenditures and organic growth over the past three years, Moody's anticipates that the peek of the investment cycle has now been reached. Going forward management is expected to use prudence as to the amount of debt raised and the size of capital expenditure programs initiated. Moody's considers a reduction in the existing debt levels and improvement in coverage ratios to more conservative levels as key to strengthen the group's financial flexibility, especially at a time of cyclical weakening and strong competitive pressures. The recent partial sale of Michelin's holdings in Peugeot has provided additional liquidity to support the group's capital structure. In its rating assignment Moody's relies on management's objective to keep gearing between 1.0 to 1.3 times (net debt/equity) which should be achieved through measure growth and consistent retention of earnings. Although larger acquisitions are currently not anticipated and have not been factored into the rating, they could be part of corporate development over the next few years as opportunities arise. Limitations include anti-trust issues and the company's own return requirement to avoid dilution of earnings.

In view of Michelin's considerable leverage, Moody's positively notes the group's conservative liquidity management and financing policies as all funding requirements are covered by committed facilities (no MAC, no covenants). Additional liquidity insurance has been arranged through two new and innovative subordinated loan facilities (at CFM with MAC at drawing only), which combine insurance and financing aspects and could cover additional funding needs in a down-cycle as well as general corporate purposes including acquisitions. In general, Michelin also puts great importance on risk management to limit its operating risks.

Moody's understands that Michelin has a decentralized financing structure with debt largely raised at subsidiary level (approximately 75%). The group's ultimate holding company Compagnie Generale des Etablissements Michelin (CGEM, France) functions as a pure holding company with a 95% ownership interest in Compagnie Financiere Michelin (CFM, Switzerland) and a 40% interest in Manufacture Francaise des Pneumatiques Michelin (MFPM, France), the group's French operating holding company. CFM is Michelin's holding company for its international operations and also retains the remaining 60% interest in MFPM.

All three companies benefit from the unlimited liability of the group's managing partners. Therefore, Moody's expects that group support and cash flows would be equally made available for debt service at each of three top group companies unless liquidity problems of the entire group would prevent debt servicing in general. The one notch lower rating for CGEM's indebtedness reflects structural subordination to debt raised at CFM, MFPM and operating subsidiary companies. The rating for CFM has not been notched down due to the company's intent to further increase CFM's importance as a central financing entity, the diverse cash flow structure provided by worldwide subsidiaries and the absence of guarantees for subsidiary indebtedness. MFPM's rating, on the other hand, reflects its operating company nature and the group support expected as part of the unlimited liability of managing partners. In general, Moody's notes, that a more centralized financing structure would improve transparency for the debt investor.

The Michelin Group, headquartered in Clermont-Ferrand, France, is one of the three leading tire manufacturers in the world with annual sales of EUR 15.8 billion in 2000. The group operates globally offering the full range of tire products including passenger, truck and specialty tires, and publishes maps and guides for travel planning.

Frankfurt
Wolfgang Draack
Senior Vice President
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700

Frankfurt
Renate Labak
Vice President - Senior Analyst
European Corporates Group
Moody's Deutschland GmbH
+49 69 707 30 700

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