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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
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
(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.
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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