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Rating Action:

MOODY'S ASSIGNS RATINGS FOR HAYES LEMMERZ FOLLOWING REORGANIZATION (B1 SR. UNSEC; Ba3 SR. SEC.)

01 May 2003
MOODY'S ASSIGNS RATINGS FOR HAYES LEMMERZ FOLLOWING REORGANIZATION (B1 SR. UNSEC; Ba3 SR. SEC.)

Approximately $800 Million of Debt Obligations Affected

New York, May 01, 2003 -- Moody's Investors Service assigned the ratings referenced below for the proposed debt obligations of the new operating company, HLI Operating Company, Inc. ("Hayes Lemmerz"). These are first-time ratings following Hayes Lemmerz' reorganization out of Chapter 11 bankruptcy. Moody's rating outlook is stable.

Hayes Lemmerz' corporate structure will be altered upon the reorganization. The current borrower under the DIP facility, Hayes International, Inc., will merge with and into HLI Operating Company Inc., with the new operating company as the surviving entity. The new ultimate holding company, to be named Hayes Lemmerz International, Inc., will notably not be the same entity as the pre-existing borrower of the same name.

Hayes Lemmerz will utilize proceeds from its new senior unsecured notes offering and new senior secured term loan facility to cover administrative and transactional expenses and to repay approximately $475 million to pre-petition lenders, $40 million to the company's DIP lenders, almost $100 million to foreign creditors, and $50 million to certain lessors. The revolving credit facility is expected to be undrawn upon closing. Ongoing common equity ownership will be allocated to holders of the pre-petition creditor claims, as follows: 53.1% to pre-petition secured claims, 44.9% to pre-petition senior notes claims, and 2% to holders of other pre-petition unsecured claims.

The following specific new ratings were assigned:

- B1 Rating for Hayes Lemmerz' proposed $225 million senior unsecured

notes maturing 2013, to be initially issued under Rule 144A;

- Ba3 Rating for Hayes Lemmerz' proposed $575 million of guaranteed

senior secured bank credit facilities, consisting of:

- $125 million guaranteed senior secured bank revolving credit facility

maturing 2008; and

- $450 million guaranteed senior secured bank term loan facility,

maturing 2009;

- Ba3 Senior implied rating;

- B1 Senior unsecured issuer rating

Hayes Lemmerz and its domestic subsidiaries are in the process of obtaining court approval for a plan of reorganization. The plan is expected to receive approval from pre-petition creditors and from the bankruptcy court during early May 2003. The proposed distributions under the plan reflect that the value of the reorganized company is considered to be substantially less than the amount of pre-petition creditor claims. All of the company's US subsidiaries and its Mexican subsidiary had originally sought Chapter 11 bankruptcy protection during December 2001, following a series of adverse events that had substantially increased leverage and reduced available liquidity. Most notably, Hayes Lemmerz' aggressive acquisition program pursued during 1996 through 1999 had failed to deliver the level of operating performance anticipated, the company faced costly operating inefficiencies within both existing and acquired production facilities, the company was unable to replace an expired accounts receivable securitization facility, North American production levels for both light vehicles and heavy duty trucks were lowered and more volatile, and certain accounting irregularities were discovered. Hayes Lemmerz' new management team and its consultants have steadily worked at alleviating each of these issues since the Chapter 11 filing.

The rating assignments reflect that while Hayes Lemmerz has already taken major steps to improve its overall cost structure and fully integrate previous acquisitions, additional productivity improvement and capacity rationalization efforts are still necessary. In order to continue winning profitable new business, improve the company's return on assets, and maintain leading market shares, Hayes Lemmerz must also continue to invest heavily in research, development, and engineering, as well as in capital expenditures. The company operates within competitive global markets that remain highly dependent upon automotive industry trends and strong consumer confidence levels. Estimates for North American production levels during 2003 and 2004 remain quite uncertain. Hayes Lemmerz' customer base remains very concentrated with the Big 3, which accounted for 55% of global revenues during 2002. The company continues to face significant OEM price compression, particularly with regard to its more commodity-oriented and more easily substituted product lines within the steel wheels, commercial highway, and aftermarket business units.

The rating assignments and stable outlook more favorably reflect that the plan of reorganization features a substantial de-leveraging of Hayes Lemmerz through the rationalization of its balance sheet via the conversion of substantially all of the company's general unsecured claims and a certain amount of secured claims into common stock. In addition, the company's new senior management team has already closed three major plants, and right-sized the commercial highway and aftermarket businesses. Management continues to rationalize capacity, reduce overhead and materials costs, and implement more effective internal controls. Hayes Lemmerz maintains leading #1 and #2 market shares across almost all product lines offered globally. The company is one of the few major wheel suppliers that can produce both steel and aluminum wheels, and is positioned for growth as the penetration of aluminum in both wheels and automotive components continues to increase in Europe and the rest of the world. Despite the fact that there was a period during early 2001 (prior to obtaining the DIP financing) when Hayes Lemmerz was off the bid list for new contracts, the company maintains a strong book of new business through at least 2006. The full amount of the proposed $125 million revolving credit facility is expected to be undrawn at closing. Hayes Lemmerz should also have flexibility to improve liquidity through implementation of accounts receivable discounting arrangements, the build up back to normal industry terms for trade credit, potential asset sales, restricted baskets for either leases or foreign credit facilities, or restrained capital spending as necessary.

Future events that could drive Hayes Lemmerz' outlook or ratings lower include a failure of the company to achieve the degree of productivity improvements anticipated, a sharp drop in industry production levels, reduced market shares, an inability to maintain adequate price points, and/or the announcement of plans for a material acquisition. Future events that could have favorable rating implications include evidence of material margin improvement, major new business awards, development of new value-added technologies, and/or achievement of debt reduction through positive retained cash flow after capital expenditures.

The Ba3 ratings of the proposed new senior bank credit facilities reflect the benefits and limitations of the collateral and guarantee package. Security will consist of first priority perfected interests in all assets of Hayes Lemmerz, its direct and indirect holding companies, and all direct and indirect domestic subsidiaries. The security package will also include pledges of intercompany notes, along with 100% of the capital stock of domestic subsidiaries and 65% of the capital stock of foreign subsidiaries. To the extent that intercompany loans have been extended to foreign subsidiaries, additional collateral from the foreign subsidiaries may also be pledged. Guarantees will be provided by Hayes Lemmerz' direct and indirect holding companies and by all of the company's direct and indirect domestic subsidiaries. The bank facility ratings cannot be notched above the senior implied rating given the large proportion of bank debt relative to the overall proposed debt structure, and also the substantial portion of non-domestic assets that are not subject to liens.

The B1 rating of the proposed new senior unsecured notes reflects their effective subordination to the company's senior secured debt facilities. The notes are to be guaranteed by the same entities as the proposed new senior bank credit facilities and will contain a change of control provision and customary high yield covenants. Interest will be payable semiannually.

January 31, 2003 fiscal year end pro forma total debt/EBITDA leverage assuming Hayes Lemmerz' proposed new capital structure was about 3.0x, both before and after adjusting for the present value of off-balance sheet leases and $10 million of preferred stock to be issued in conjunction with the reorganization of the capital structure. The company's pro forma EBIT interest coverage for the period was satisfactory about 2.5x, while its pro forma EBIT return on total assets was weak at about 5.1%.

Hayes Lemmerz, headquartered in Northville, Michigan, is a leading worldwide supplier aluminum and steel wheels for the light vehicle and commercial highway markets. The company is also a leading supplier in the high growth market for aluminum products, including suspension, brake, and powertrain components. Annual revenues approximate $2 billion.

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

New York
Lisa B. Matalon
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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