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Rating Action:

MOODY'S CONFIRMS DEBT RATINGS OF FEDERAL-MOGUL (SENIOR UNSECURED NOTES AND BANK CREDIT FACILITIES AT Ba2)

11 Jan 2000
MOODY'S CONFIRMS DEBT RATINGS OF FEDERAL-MOGUL (SENIOR UNSECURED NOTES AND BANK CREDIT FACILITIES AT Ba2) Moody's Investors Service confirmed Federal-Mogul Corporation's debt ratings including the (P)Ba2 rating of its $4 billion shelf registration for senior debt, (P)B1 for subordinated debt, (P)"b1" for preferred stock, as well as its Ba2 senior unsecured issuer rating. In addition, Moody's confirmed its Ba2 ratings on the $3.9 billion senior bank credit facilities, senior notes and medium-term notes program, and the "b1" rating of the company's $575 million of 7% trust convertible preferred securities. Federal -Mogul's senior implied rating is Ba2 and the outlook is stable.


The ratings reflect Federal-Mogul's significant position in the global marketplace for original equipment and aftermarket products; notable geographic and product diversity and its experienced, proactive management team with a focus on strengthening the company's capital structure.


However, the ratings also consider Federal-Mogul's aggressive acquisition strategy; significant integration challenges; weak balance sheet (intangibles comprise 44% of total assets) and substantial and rising expenses associated with its asbestos-related liabilities. During the latter half of 1999, Federal-Mogul reported disappointing earnings and higher than expected asbestos expenses. In addition, the company is vulnerable to the highly competitive and cyclical environment in which it operates.


The company's rating outlook is stable; the outlook incorporates both the potential for acquisitions as well as the likelihood that management intends to finance the company's acquisitions with both debt and equity.


The Ba2 rating on the senior bank facilities also reflects the benefits and limitations of the credit agreement. The facilities are secured by a pledge of the stock of Federal-Mogul's domestic subsidiaries and 65% of certain foreign subsidiaries. Certain of the pledges also apply to the company's global notes, medium term notes and senior notes. Additionally the bank credit facilities and notes are guaranteed by certain Federal-Mogul subsidiaries. The global notes, medium term notes and senior notes are ranked pari passu with its bank facilities and are therefore also rated Ba2.


The "b1" rating on the 7% convertible trust preferred securities reflects the junior subordinated nature of the securities issued by Federal-Mogul, which in turn, enable Federal-Mogul capital trust to make distributions on the preferred securities. The company cannot force conversion of the securities into common stock until December 6, 2000 and at a strike price of $51.50 per share.


As of September 30, 1999, Federal-Mogul's total debt is substantial at $4.2 billion (including the $575 million of trust preferred securities and $217 million of off-balance sheet account receivables financing). Leverage is high with total debt-to-book capitalization of 66%; debt-to-market capitalization is higher at 74% as a result of the sharp deterioration in Federal-Mogul's share price following its announced earnings shortfall. Trailing 12 months debt-to-EBITDA is moderate at 3.4 times. Cash flow coverage is satisfactory when measured by EBITA coverage of interest expense at 3.2 times, however it is considerably lower if the company's asbestos expenses are included. EBITA covers interest expense and asbestos payments only 2.0 times. Federal-Mogul's EBITA return on assets is relatively weak at 9.3%.


Moody's is concerned about the challenges facing management given the substantial growth in the company's revenues (from $4.5 billion at year end 1998 to $6.4 billion as of September 30, 1999); the need to continue its integration process and the risk associated with its asbestos-related litigation. Notably, Federal-Mogul continues to stress its commitment to a solid capital structure and has suggested it is unlikely to pursue large acquisitions unless the transaction can be funded with both debt and equity. In addition, the company has $1.3 billion in reserves and an additional $800 million of reinsurance coverage which it believes should be sufficient to cover its asbestos-related expenses. Federal-Mogul's diversity helps offset some concerns regarding cyclicality; sales are geographically divided between North America, 63%; Europe, 32% and the rest of the world, 5%. Products are 47% aftermarket, 53% original equipment and include powertrain, sealing systems, and general products (brake, chassis, ignition and fuel).


Federal Mogul's performance in the aftermarket has proved disappointing; the company has been impaired by both soft demand and the loss of key customers. In addition, the company's ability to continue to pursue its acquisition strategy and reach its goal of achieving $10 billion in revenues by 2002 is likely to be inhibited. However, given Federal-Mogul's current strategic emphasis on its capital structure, the strength of its cash flow and market position, its ratings continue to be considered appropriate.


Federal-Mogul Corporation, headquartered in Southfield, Michigan, is a global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products.

No Related Data.
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