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22 Nov 2000
MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR NOTES TO B2; REVIEWS RATINGS FOR POSSIBLE FURTHER DOWNGRADE
Approximately $4.7 Billion of Debt Obligations Affected.
New York, November 22, 2000 -- Moody's Investors Service downgraded the ratings of Federal-Mogul
Corporation ("Federal-Mogul") and placed the ratings under review
for possible further downgrade. The following ratings were affected:
(i)Downgrade to B2, from Ba3, Federal-Mogul's $1.75
billion of senior
unsecured bank credit facilities, consisting of a $1 billion
credit due 2004, a $400 million ($370 million remaining)
term loan A due
2004 and a $350 million ($347 million remaining) term loan
B due 2005;
(ii)Downgrade to B2, from Ba3, Federal-Mogul's aggregate
of senior unsecured notes with various maturities;
(iii) Downgrade to Caa1, from B2, Federal-Mogul's $575
million of 7% junior
subordinated debentures due 2027, together with a downgrade to
"caa", from "b2" of the corresponding rating of Federal-Mogul
Trust $575 million of guaranteed trust preferred securities;
(iv)Downgrade to (P)B2/(P)Caa1/(P)"caa", from (P)Ba3/(P)B2/(P)"b2"
Federal-Mogul's shelf registration for senior debt, subordinated
debt and preferred stock, respectively;
(v)Downgrade to B2, from Ba3, Federal-Mogul's senior
implied rating; and
(vi)Downgrade to B3, from B1, Federal-Mogul's senior
The ratings actions reflect Moody's escalating concerns regarding Federal-Mogul's
near-term liquidity and solvency. The company's operating
cash flow has steadily declined over the last twelve months, with
reported quarterly results repeatedly falling materially below management's
earlier market guidance. The market's anticipated decline in OEM
production volumes in 2001 will likely place further pressure on sales
and margins. While Federal Mogul's announced "six global initiatives"
are logically aimed at better integrating acquisitions; resizing
certain segments to current market conditions; controlling working
capital; and generally imposing more effective controls company-wide,
implementation will entail roughly two years of significant net cash outflows
before the benefits of the restructuring become evident. Moody's
continues to have concerns about Federal-Mogul's ability to manage
its asbestos obligations, despite the existence of certain beneficial
insurance policies. The company acknowledges that it has experienced
an escalation in cash settlements and claims year-to-date,
and has responded to the market's concerns by hiring the econometric firm
National Economic Research Associates ("NERA") to update estimates of
Federal-Mogul's future asbestos obligations. Management
has indicated that the results of this study are expected to be available
in late December 2000. Moody's additionally believes that there
is a high likelihood that Federal-Mogul will violate the terms
of its existing credit agreement upon fiscal year end December 31,
2000. Given the highly distressed trading prices of Federal-Mogul's
debt and equity, together with the currently depressed market for
certain non-core automotive assets which Federal-Mogul would
consider divesting, Moody's perceives an almost complete reliance
at this point in time on the continued support of the company's existing
The company has the ability to pledge certain of its hard assets as collateral
supporting obligations under the bank credit agreement without triggering
any default provisions within the senior unsecured indentures.
While both the bank facilities and senior notes are currently supported
by certain stock pledges, a larger number of subsidiaries' stock
is pledged to the bank facility lenders. Per the terms of the note
indentures and the bank credit agreement, the senior bank credit
facilities and senior notes are supported by equivalent guarantees.
Moody's expects that successful negotiations regarding an amended bank
facility will most likely entail securing the credit agreement with significant
new collateral protection. While the majority of Federal-Mogul's
accounts receivable already support the company's $420 million
off-balance sheet accounts receivable facility, other potential
security is unencumbered. In the event that the banks become secured
by material hard asset collateral, Moody's could consider a notching
difference between the rating of the $2.325 billion of senior
unsecured notes and the $1.75 billion of senior unsecured
bank credit facilities.
The rating actions also consider Federal-Mogul's continued significant
position in the global marketplace; its notable geographic and product
diversity and its reputable brands; as well as the company's plans
to immediately curtail non-customer related expenses and capital
projects and implement various initiatives to improve operating performance
through the acceleration of lean manufacturing techniques, expansion
of supply chain management and further consolidation of global operations.
It was indicated that the search for a new chief executive will focus
on individuals who have proven abilities to execute at the operational
level. Management and the board recognize that Federal-Mogul's
aftermarket infrastructure must be promptly downsized in order to adjust
to fundamental changes in both aftermarket demand and retailing dynamics.
Moody's expects to conclude its review upon Federal-Mogul's execution
of a combination of the following events: (i) completion of negotiations
with the company's bank group that Moody's believes will result in adequate
ongoing liquidity; (ii) evaluation by Moody's of the results of the
pending NERA asbestos study; (iii) review by Moody's of more definitive
management guidance regarding operating cash flow during 2001 and beyond;
and (iv) definitive evidence that an effective permanent chief executive
candidate will be identified by Federal-Mogul in a timely fashion.
Federal-Mogul, 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. Customers
include both original equipment manufacturers and aftermarket distributors.
Senior Vice President
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653
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.
© 2020 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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