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Rating Action:

MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR UNSECURED NOTES TO Caa3, JUNIOR SUBORDINATED NOTES TO Ca, AND SENIOR SECURED BANK DEBT TO Caa1; OUTLOOK IS NEGATIVE

27 Jul 2001
MOODY'S DOWNGRADES FEDERAL-MOGUL'S SENIOR UNSECURED NOTES TO Caa3, JUNIOR SUBORDINATED NOTES TO Ca, AND SENIOR SECURED BANK DEBT TO Caa1; OUTLOOK IS NEGATIVE

Approximately $4.7 Billion of Debt Obligations and Bank Credit Facilities Affected

New York, July 27, 2001 -- Moody's Investors Service has lowered all of Federal-Mogul Corporation's ("Federal-Mogul") ratings by one notch. The rating action was primarily generated by Moody's growing concerns regarding the potential escalation of financial demands on Federal-Mogul related to the company's exposure to asbestos liabilities. The rating outlook is negative.

The following specific rating changes were made:

(i) Downgrade to Caa1, from B3, 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 of bank credit facilities, 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 Caa3, from Caa2, of Federal-Mogul's aggregate $2.325 billion of senior unsecured notes with various maturities;

(iii) Downgrade to Ca, from Caa3, of $575 million 7% junior subordinated debentures due 2027, and downgrade to "ca", from "caa", of the corresponding rating of Federal-Mogul Financing Trust's $575 million of guaranteed trust preferred securities;

(iv) Downgrade to (P)Caa3, from (P)Caa2, of Federal-Mogul's shelf registration for senior debt;

(v) Downgrade to (P)Ca/(P)"ca", from (P)Caa3/(P)"caa" of Federal-Mogul's shelf registration for subordinated debt and preferred stock, respectively;

(vi) Downgrade to Caa1, from B3, of Federal-Mogul's senior implied rating; and

(vii) Downgrade to Caa3, from Caa2, 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 downgrades reflect Moody's perception that a considerably more negative tone was conveyed within recent comments made by Federal-Mogul's senior management team with regard to the magnitude of the company's asbestos exposure, as well as by Federal-Mogul's July 25, 2001 decision to no longer direct employees' retirement fund contributions and company matching contributions into the company's own stock. Moody's perceives that these comments and actions signal that Federal-Mogul is more seriously considering the option of filing for Chapter 11 bankruptcy protection. To be more specific, within Federal-Mogul's July 19, 2001 press release regarding second quarter 2001 results, chief executive officer Frank Macher stated the following negative points regarding the company's progress with regard to asbestos exposure: "During the second quarter, Federal-Mogul made $82 million of asbestos-related payments. The company continues to receive a high volume of new claim filings. The recent bankruptcies of certain co-defendant companies in asbestos litigation, and the resulting decrease in voluntary asbestos liability settlements and payments by such companies, are contributing to increased financial demands against Federal-Mogul. In addition, the recent political leadership shift in the United States Senate increases the difficulty, particularly in the near term, of achieving a legislative solution to the asbestos liability issues faced by Federal-Mogul and others." Federal-Mogul stated that the change in the retirement plan was strictly an effort to calm employees who have been distracted by the stock movements, and that the company will continue to make matching retirement plan contributions in the form of cash.

Moody's rating downgrade action on June 25, 2001 reflected our ongoing and 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 might be substantially realized. Moody's also maintains its previously stated concern that there remains 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 many senior managers.

Moody's rating actions also consider that the company has closed on the sale of its Aviations Products unit for $160 million of gross proceeds, and is in the process of selling certain other small non-core assets. While the company is not required to apply any of these proceeds to permanently reduce outstanding bank debt until gross proceeds exceed $300 million, Moody's believes that the bulk of net proceeds to date have been used to reduce Federal-Mogul's outstanding bank revolving credit balance. Federal-Mogul continues to pursue opportunities to exchange senior unsecured notes for equity, and Moody's review of the company's second quarter financial statements concludes that slightly more than $20 million of principal has already been exchanged on that basis. Federal-Mogul maintains 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 could be expected to produce significantly enhanced operating and cash flow performance by 2004 or earlier.

The updated senior secured bank credit facility ratings indicate that Moody's believes that there is the possibility of some impairment in the event that a liquidation of the company's assets were to occur. Federal-Mogul's current market capitalization of under $90 million falls well below the company's second quarter's estimated GAAP equity level of about $1.25 billion. The domestic bank credit agreement notably does not have direct liens on the assets of Federal-Mogul's foreign subsidiaries (although foreign lenders to certain of Federal-Mogul's foreign subsidiaries do hold such direct liens on the foreign assets of the specific subsidiaries involved). The $350 million of recent incremental unrated bank credit facilities have the superior position relative to collateral. This fact potentially diminishes recovery prospects for the rated bank credit facilities. Despite Moody's heightened concerns about the prospects for default, in the event of a sale of the company as an ongoing concern a 3 times LTM EBITDA multiple might be sufficient to satisfy recovery of all of the bank debt. Moody's has maintained the notching of the capital structure that was established within our June 25, 2001 press release on Federal-Mogul. At that date the notching between the senior secured bank facilities and the company's other obligations was widened to reflect an increasing weighting of the recovery component of expected loss, given Moody's view that the company's default potential became significantly greater than before. Moody's considers that Federal-Mogul's senior unsecured notes have effectively taken a role as a subordinated component of the company's capital structure, given the magnitude of the secured debt that has a prior claim.

Federal Mogul's second quarter 2001 performance was on par with the levels previously anticipated by Moody's, but fell well below prior year levels which did not yet reflect a cyclical downturn within the automotive market. Management also indicated that Federal-Mogul did not enjoy as much of a benefit as did some of the company's peers from the second quarter strengthening of the overall North American original equipment market due to the product offerings of European and Japanese car manufacturers. As a result, Federal Mogul's rolling-four-quarter debt protection measures continued to deteriorate. Notably, management does remain confident that Federal-Mogul will remain in full compliance for the second quarter end with all financial covenants within the senior secured bank credit agreement. For the last 12 months ended June 30, 2001, leverage was very high. Total debt (including preferred stock and off-balance sheet receivables loans) was approximately 8x EBITDA, and approximately 22x "EBITDA minus asbestos payments." EBITA coverage of interest and preferred dividends was approximately 1.0x before deduction of asbestos settlement payments, and negative after deduction. The company's LTM EBITA return on assets was negligible at 3% before deduction of asbestos settlement payments, and was negative after deduction. Total debt increased as a percentage of revenues to almost 78%, 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.

New York
Daniel Gates
Senior Vice President
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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