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Rating Action:

MOODY'S LOWERS LEAR CORPORATION RATINGS (CORPORATE FAMILY AND SENIOR UNSECURED TO B2); OUTLOOK NEGATIVE

20 Mar 2006
MOODY'S LOWERS LEAR CORPORATION RATINGS (CORPORATE FAMILY AND SENIOR UNSECURED TO B2); OUTLOOK NEGATIVE

Approximately $1.8 billion of rated obligations

New York, March 20, 2006 -- Moody's Investors Service has lowered Lear Corporation's ("Lear") Corporate Family and Senior Unsecured Debt ratings to B2 from Ba2. The actions reflect deterioration in Lear's operating performance and prospects below previous expectations. Leverage is anticipated to remain elevated over the intermediate term. While restructuring initiatives should support earnings and cash flow over the next two years, the company faces ongoing challenges of customer concentration, vehicle/platform mix issues, margin pressure from un-recouped raw material costs, and exposure to potential disruptive events in the North American automotive industry. Debt coverage measurements will be more reflective of a single B credit. Although Lear's scores for qualitative factors under Moody's Auto Supplier methodology recognize strengths in its scale, leading share in multiple geographic markets, and progress in diversifying its customer base through growth in new business volumes, prospective debt protection and profitability ratios more than offset the company's otherwise sound business profile. The outlook remains negative.

Ratings changed;

Corporate Family B2 from Ba2

Senior Unsecured B2 from Ba2

Shelf registration for senior unsecured, subordinated, and preferred at (P)B2, (P)Caa1, and (P)Caa2 respectively

Rating affirmed;

Speculative Grade Liquidity rating, SGL-3

Lear's SGL rating was revised on March 3, 2006. The rating outlook was changed to negative on January 12, 2006.

Lear's strengths recognized in Moody's auto supplier rating methodology include its leading market shares in seating systems, interiors and electrical distribution systems in North America, Europe and, through joint ventures, a significant presence in select Asian markets. Similarly, it continues with substantial scale, efficient quality manufacturing, integrated interior component offerings and a global footprint which provide certain advantages and attraction to global automotive OEMs. Lear has also been successful in achieving new business awards which will, over time, grow revenues and diversify its customer base. Capital expenditures are expected to retreat from 2005 levels when the company heavily invested for new business launches.

However, the ratings also incorporate challenges within the cyclical automotive supplier industry, and, importantly Lear's dependence upon revenues with General Motors ("GM" with 28% of global revenues in 2005) and Ford Motor Company ("Ford" with 25%). Both GM and Ford are experiencing pressure on their respective market shares in the critical North American market (revenues in the US and Canada accounted for roughly 45% of Lear's revenues in 2005). In part this pressure arises from lower volumes in their truck and SUV product offerings on which Lear historically has had significantly higher content per vehicle. Higher raw material costs, primarily driven by petroleum derivatives and steel, have had to be absorbed as pricing arrangements with customers provide limited scope for adjustment, and more often call for annual price-downs. As a result, Lear's scores under the methodology for profitability and cash flow stability have deteriorated. Similarly, its capital structure has been weakened from non-cash charges taken during 2005 on the valuation of its interior business and an allowance against its deferred tax assets. While Moody's would expect the company on a consolidated basis to remain profitable and to be modestly free cash flow generative, absent endogenous developments within the industry, coverage ratios have deteriorated and are expected to remain weak over the next few years. In 2005 Lear's domestic operations reported negative earnings before tax, minority interests and equity income/loss in affiliates in an amount exceeding the non-recurring charges taken during the year.

Lear also faces significant debt maturities in early 2007 as well as 2008 and 2009. It will become more reliant on its committed revolving credit facility for liquidity support. Its defined leverage covenant under its principal bank credit agreement is scheduled to step-down in two quarterly increments to 3.25 times at the end of the second quarter of 2006 from the 3.75 times applicable at year end 2005. Lear was in compliance with its covenants at year end 2005, and ought to remain in compliance, absent external developments, over the next year. However, headroom under the covenants could diminish should performance not stabilize or improve, and effective availability on quarterly reporting dates could be less than the full amount of the commitment. These factors are incorporated into the company's liquidity rating of SGL-3, representing adequate liquidity over the next year.

The negative outlook considers substantial current maturities, downside risks from North American consumer interest in light trucks, ongoing pressure on margins from high raw material costs, exposure to developments in GM's and Ford's North American market share, as well as industry uncertainty arising from negotiations between GM, the UAW and Delphi Corporation as well as Ford, Tower Automotive and the UAW. Developments in the latter issue could adversely affect Lear's volumes and potentially stress other suppliers with whom Lear may have some dependency. Similarly, Lear's exploration of strategic alternatives for its interior systems segment could result in a reduction in assets and cash flows available to support its debt.

Using Moody's standard definitions and excluding certain non-recurring charges, Lear's debt/EBITDA was approximately 4.7 times at the end of 2005, and its EBIT/Interest coverage had declined to roughly 1.4 times. Lear normally borrows intra-quarter under its revolving credit facility to finance working capital requirements and typically reduces outstandings at the end of the period as customer payments are received. Leverage ratios using average borrowings would most likely result in higher leverage calculations than those involving quarterly reporting dates. Free cash flow for 2005 was negative, but is expected to revert to break-even or slightly positive levels in 2006 and beyond as capital investments will retreat from 2005 levels and profitable net new business awards come on stream. However, free cash flow and other profitability measures will be more reflective of a B2 Corporate Family rating. Both the bank debt, which is not rated by Moody's, and the unsecured notes share certain up-streamed guaranties from domestic and certain international subsidiaries. However, the bank facility does have a security interest in shareholdings in a limited number of subsidiaries who are not guarantors. To date, collateral granted to the banks has not been deemed significant enough to differentiate the rating of the unsecured notes from the Corporate Family rating given the relatively limited size of the pledged companies to the aggregate enterprise. Similarly, there are no requirements on the parent to maintain any financial characteristic of these subsidiaries or assets within those entities whose shares are pledged. However, if incremental security or other enhancements were given for the bank credit facilities that did not similarly benefit the unsecured notes, a rating differential on the unsecured notes could develop. Indentures for the public notes constrain the borrower's and its guaranteeing subsidiaries ability to grant collateral interests without ratably securing the notes.

Developments that could lead to a stable rating outlook include stabilization of industry conditions and market shares in North America, successfully addressing current debt maturities that would improve Lear's liquidity position, and improving margins which would result in debt/EBITDA retreating below 4 times, EBIT/Interest coverage approaching 2 times, and improved headroom under its financial covenants. Developments that could lead to lower ratings include recurring negative free cash flow, further deterioration in margins which would lead to debt/EBITDA of 6 times or higher, and interest coverage falling below 1 time.

Lear Corporation, headquartered in Southfield, MI, is an integrator of automotive interiors, including seat systems, interior trim and electrical systems. The company had revenues of $17 billion in 2005 and has more than 110,000 employees in 34 countries.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Edwin Wiest
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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