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Rating Action:

MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR NOTES TO Ba3, CONCLUDING REVIEW; OUTLOOK IS NEGATIVE

16 Oct 2000
MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR NOTES TO Ba3, CONCLUDING REVIEW; OUTLOOK IS NEGATIVE

Approximately $4.7 Billion of Debt Obligations Affected.

New York, October 16, 2000 -- Moody's Investors Service downgraded the ratings of Federal-Mogul Corporation ("Federal-Mogul") and maintains a negative outlook. The following ratings downgrades were effected:

(i)Downgrade to Ba3, from Ba2, of Federal-Mogul's $1.75 billion of senior

unsecured bank credit facilities (consisting of a $1 billion revolving

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 Ba3, from Ba2, of Federal-Mogul's aggregate $2.325 billion

of senior unsecured notes with various maturities;

(iii) Downgrade to B2, from B1, of Federal-Mogul's $575 million of 7% junior

subordinated debentures due 2027, together with a downgrade to

"b2", from "b1" of the corresponding rating of Federal-Mogul Financing Trust $575

million of guaranteed trust preferred securities;

(iv) Downgrade to "b2" from "b1" of Federal-Mogul's preferred stock;

(v)Downgrade to (P)Ba3/(P)B2/(P)"b2", from (P)Ba2/(P)B1/(P)"b1" of

Federal-Mogul's shelf registration for senior debt, subordinated

debt and preferred stock, respectively;

(vi)Downgrade to Ba3, from Ba2, of Federal-Mogul's senior implied rating; and

(vii)Downgrade to B1, from Ba2, of Federal-Mogul's senior unsecured issuer

rating.

The ratings actions reflect Moody's concerns regarding Federal-Mogul's series of senior management changeovers including the resignation of its Chairman and Chief Executive Officer; changes in the tactics employed to achieve the company's strategic objectives; inability to meet near-term projections; problems effectively integrating its 18 recently-acquired businesses, rationalizing facilities and generating greater operating efficiencies in an expedient manner; higher-than-expected asbestos settlements; and materially negative impacts on earnings and working capital of several market dynamics including the rapid devaluation of the Euro and the much-greater-than-forecasted softening of both the North American aftermarket and the heavy duty truck market. Management now estimates that Federal-Mogul will have a $200 million fiscal year 2000 cash flow shortfall, in contrast to the minimum cash-neutral position it estimated in June 2000 and the positive $200 million cash surplus predicted at the outset of the year. The company remains highly levered, especially after taking into account the $420 million off-balance sheet accounts receivable securitization facility and the uninsured portion of Federal-Mogul's actual and potential asbestos claims obligations. Additionally, the company's stock price has been steadily declining from an almost $70 per share high in early 1999, to a low of $3.75 per share last week, thereby diverting management's attention and hampering Federal-Mogul's financial flexibility. Concerns about Federal-Mogul's ability to manage its asbestos liabilities have recently been heightened, given the escalation in cash settlements that the company has actually paid year to date versus its earlier year 2000 guidance.

More positively, 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. While the decline in the Euro and certain other currencies affects about one-third of Federal-Mogul's business, the company's policy is to hedge for any cash-oriented risks. Federal-Mogul maintains that it is adequately reserved and insured for pending asbestos liabilities.

Federal-Mogul announced that it expects a break-even third quarter ending September 30, 2000 and that fourth quarter earnings will be modestly improved from that level. Earnings per share in 2000 will therefore run materially below management's June 2000 market guidance of $3 per share and initial expectations of $4 per share. Leverage as measured by "total debt/EBITDA" (excluding roughly $408 million in usage under the $420 million off-balance sheet accounts receivable facility and the company's asbestos liabilities) will approximate 4x for the twelve months ending December 2000, and EBITA coverage of interest and asbestos payments will likely fall below 2x. Federal-Mogul's EBITA return on assets is substandard for its rating category at about 9%.

Federal-Mogul has indicated that it will provide more detailed market guidance for near-term earnings and cash flow later this week, coincident with the company's third quarter earnings announcement. Federal-Mogul's management and board of directors will back up the expectations with the details of initiatives to be aggressively implemented with the objective of upgrading performance and controls.

While Moody's has not notched the rating of the $2.325 billion of senior unsecured notes below the $1.75 billion of senior unsecured bank credit facilities and the expectation was that they would function as pari passu obligations, there is some indication that the banks are potentially in a more secure position. In the event of a default under Federal-Mogul's bank credit agreement, the company has the ability to pledge certain of its hard assets as collateral 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 both the note indentures and bank credit agreement, the senior bank credit facilities and senior notes are supported by equivalent guarantees. In contrast, the senior unsecured issuer rating reflects the assumption that there are no subsidiary guarantees of the Federal-Mogul obligations, thereby explaining the two-notch downgrade of that rating.

Moody's ongoing analysis of Federal-Mogul will consider several factors including the awaited updated earnings and cash flow guidance, together with the company's success in achieving its revised forecasted results over the coming fiscal quarters; refined quantification of the downside remaining in the aftermarket, heavy duty market, and foreign currency markets; Moody's evaluation of the ability of the interim chief executive and board of directors to re-focus the business on programs that will reduce debt and improve leverage and interest coverage; and our confidence that an effective permanent chief executive candidate will be identified in a timely fashion. We will additionally look to gain more feedback on the company's expected ongoing liquidity, potential asset sales and conclusions of an updated asbestos actuarial study that will be conducted shortly. The current ratings and outlook are based upon information that is currently available to Moody's and are potentially subject to prompt adjustment either upward or downward in the event of future unexpected announcements by Federal-Mogul.

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.

New York
Tom Marshella
Managing Director
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

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