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25 Jun 2001
MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR UNSECURED NOTES TO Caa2, JUNIOR SUBORDINATED NOTES TO Caa3, AND SENIOR SECURED BANK DEBT TO B3; OUTLOOK IS NEGATIVE
Approximately $4.7 Billion of Debt and Bank Credit Facilities Affected
New York, June 25, 2001 -- Moody's Investors Service has lowered all of the ratings (with the exception
of preferred stock ratings which were confirmed) of Federal-Mogul
Corporation ("Federal-Mogul"), reflecting Moody's growing
concerns regarding the company's liquidity position over the next 12-to-18
months. The rating outlook is negative.
The following specific rating actions were taken:
(i) Downgrade to B3, from B2, of Federal-Mogul's $1.75
billion in rated senior secured bank credit facilities;
The rated senior secured bank credit facilities consist of a $1
billion revolving credit due 2004, a $400 million term loan
A due 2004, and a $350 million term loan B due 2005;
The December 2000 incremental $200 million senior secured revolving
credit facility and $150 million senior secured term loan C are
not rated by Moody's. These incremental facilities were initiated
in conjunction with the December 2000 amendment and restatement of the
now $2.1 billion bank credit agreement, under which
the bank lenders were also provided with a blanket lien on all assets
(with an established priority among the individual credit facilities in
the event of bankruptcy);
(ii) Downgrade to Caa2, from B3, of Federal-Mogul's
aggregate $2.325 billion of senior unsecured notes with
(iii) Downgrade to Caa3, from Caa1, of $575 million
7% junior subordinated debentures due 2027, and confirmation
of the corresponding "caa" rating of Federal-Mogul Financing Trust's
$575 million of guaranteed trust preferred securities;
(iv) Downgrade to (P)Caa2, from (P)B3, of Federal-Mogul's
shelf registration for senior debt;
(v) Downgrade/confirmation to (P)Caa3/(P)"caa", from (P)Caa1/(P)"caa"
of Federal-Mogul's shelf registration for subordinated debt and
preferred stock, respectively;
(vi) Downgrade to B3, from B2, of Federal-Mogul's senior
implied rating; and
(vii) Downgrade to Caa2, from B3, of Federal-Mogul's
senior unsecured issuer rating
Federal-Mogul has several additional debt obligations in place
which are not directly rated by Moody's, but which impact Moody's
analysis of the company. These additional obligations include an
off-balance sheet accounts receivable securitization agreement;
approximately $200 million of foreign senior loan commitments secured
by foreign assets; and approximately $250 million of surety
bonds provided by insurance companies to support asbestos obligations
pertaining to prior Center for Claims Resolutions ("CCR") settlements.
The rating actions and negative outlook reflect Moody's escalating concerns
that the company will continue to produce negative cash flow through mid-2002,
and that existing availability under the US and foreign bank credit facilities
may prove insufficient to get Federal-Mogul through the cyclical
automotive downturn to the point when the benefits of the comprehensive
"Six Global Initiatives" restructuring program can be substantially realized.
The company is in the process of implementing this restructuring program
at the same time that both its North American original equipment end markets
and worldwide aftermarket end markets continue to weaken. A key
element of the restructuring program is to address the company's high
fixed cost base, which is very negatively impacting operating margins
as production volumes decline. Federal-Mogul's performance
is additionally being compromised by higher energy costs; unfavorable
product mix adjustments; and the negative impact of foreign exchange
rate fluctuations. Based upon results through the first quarter
ended March 31, 2001, Moody's believes that the early cash
costs of the restructuring program are exceeding management's original
estimates. Despite the fact that asbestos settlements appear to
have stabilized at this time, Federal-Mogul still expects
to incur asbestos settlement payments of approximately $350 million
in 2001. Moody's analysis of Federal-Mogul's debt protection
measures including the impact of asbestos payments indicates an inability
for the company's operations to meaningfully service both interest and
principal payment obligations. Moody's is further concerned that
there is potential for new senior secured bank covenant violations in
2001. In Moody's opinion, bank group members may take a much
tougher negotiating stance the next time around, since the senior
bank obligations are now protected by fully perfected collateral interests.
Furthermore, the company is in the process of a management overhaul.
While Federal-Mogul's new Chief Executive Officer and President
are both known throughout the automotive industry as seasoned and effective
operators, the company has lost a tremendous amount of institutional
knowledge with the departures of Dick Snell, Alan Johnson,
Federal-Mogul's ratings actions also consider that the company
has closed on the sale of its Aviation Products unit for $160 million
in gross cash proceeds. This provides the company with a meaningful
and much-needed liquidity boost. Given that asset sales
proceeds since execution of the December 2000 senior bank amendment and
restatement have not yet exceeded $300 million, the company
is not required to apply any of these proceeds to permanently reduce outstanding
bank debt. In June 2001, Federal-Mogul announced that
investors have exchanged $20 million of senior unsecured notes
for equity. The company also highlights that it believes its asbestos
management program going forward is sensible; that the company continues
to have a $771 million asbestos insurance recoverable, and
that obligations for prior CCR sharing settlements are adequately secured
by each of the former CCR members, including those member companies
which have already filed for bankruptcy protection. Federal-Mogul
continues to maintain a significant position in the global marketplace,
with #1 or #2 positions in nine key product categories and strong
brand recognition. The company has substantial geographic and product
diversity and continues to win material new business. Effectively
implemented, Federal Mogul's "Six Global Initiatives" would create
a considerably leaner and more effective organization, which would
be expected to produce significantly enhanced operating and cash flow
performance by 2004 or earlier.
The widening of Moody's notching of the capital structure reflects an
increasing weighting of the recovery component of expected loss,
as Moody's now views the company's default potential as being significantly
greater than before. The senior unsecured notes are effectively
taking a role as a subordinated component of the capital structure,
given the magnitude of secured debt which has a prior claim.
For the 12 months ended March 31, 2001, leverage was very
high. Total debt (including preferred stock and off-balance
sheet receivables loans) was approximately 7.1 times EBITDA,
and approximately 15.4 times "EBITDA minus asbestos payments."
EBITA coverage of interest and preferred dividends was approximately 1.4
times and 0.2 times, respectively, before and after
deducting asbestos settlement payments. The company's LTM EBITA
return on assets was negligible at 4.1% and 0.6%,
respectively, before and after deducting asbestos settlement payments.
Total debt increased as a percentage of revenues to almost 77%,
up from 71% at fiscal year end December 31, 2000, and
up from 58.5% at fiscal year end December 31, 1999.
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
Corporate Finance Group
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.
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