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Rating Action:

MOODY'S LOWERS RATINGS ON VIASYSTEMS' SENIOR SUBORDINATED NOTES TO Caa3 AND ITS GTD SENIOR SECURED BANK CREDIT FACILITY TO B3

02 Nov 2001
MOODY'S LOWERS RATINGS ON VIASYSTEMS' SENIOR SUBORDINATED NOTES TO Caa3 AND ITS GTD SENIOR SECURED BANK CREDIT FACILITY TO B3

Approximately $1.1 Billion of Debt Securities Affected.

New York, November 02, 2001 -- Moody's Investors Service lowered Viasystems Group, Inc.'s ratings and revised the company's ratings outlook to negative. The following ratings are affected:

(i) Lowered to Caa3 from B3 Viasystems' $500 million 9-3/4% senior subordinated notes, due 2007;

(ii) Lowered to B3 from B1 Viasystems' $149 million guaranteed senior secured tranche B term loan, due 2007;

(iii) Lowered to B3 from B1 Viasystems' $289 million guaranteed senior secured Chips term loans, due 2005;

(iv) Lowered to B3 from B1 Viasystems' $150 million guaranteed senior secured revolving credit facility, due 2005, of which $26 million had been drawn as of September 30, 2001;

(v) Senior implied rating lowered to B3 from B1; and

(vi) Senior unsecured issuer rating lowered to Caa1 from B2.

The ratings downgrade is based on the continued downturn in telecommunications capital equipment spending, and the impact that delayed product ramps are having on Viasystems' revenues and cash flow. Full recovery of principal is now in jeopardy, and has become the dominant factor in the rating on Viasystems' senior subordinated notes as the company's balance sheet, highly leveraged since the initial 1997 issuance of the notes, has deteriorated significantly after a succession of write-offs and restructuring charges since the beginning of the year. Stockholders' equity swung from $90 million as of December 31, 2000 fiscal year end to a negative $171 million as of September 30, 2001, largely due to a $49 million inventory write-down; $139 million in restructuring and impairment charges related to reductions in force and the cessation of operations at the former Lucent printed circuit board (PCB) facility in Richmond, Virginia and the company's Puerto Rico PCB plant; and a $144 million write-off of a note received from the independent PCB entity spun off to the company's pre-IPO shareholder, Hicks, Muse Tate & Furst, at the time of the company's IPO. Debt, including a $100 million senior note placed in July with Hicks, Muse, totaled 6.2 times LTM EBITDA as of FY2001Q3 end. Viasystems is in compliance with the 3.25 times senior debt leverage test established under the second amendment to its bank credit agreement, negotiated as recently as June 28. Although the test will be relaxed to 4.0 and 4.2 times over FY2001Q4 and FY2002Q1, respectively, the company could have difficulty meeting this less stringent covenant requirement over the next several quarters. Moody's is concerned that the senior subordinated notes' distressed trading levels would prompt Viasystems' banking group to demand a bond restructuring before acquiescing to any further covenant changes. The company has accumulated a deficit, only partially offset by paid-in capital, of over $1.7 billion, contributing to a negative consolidated tangible net worth of $614 million against about $1.05 billion of balance sheet debt.

The ratings additionally take into account Viasystems' narrow LTM free cash coverage of pro forma fixed charges, based on expected capital expenditures of $70-75 million for FY2001, of 1.3 times, and somewhat modest 6.8% return on assets, based on LTM EBITA. FY2001Q1-Q3 operating income barely broke even after accounting for the charges and write-offs. FY2001Q3 revenues declined 34% year-over-year, with 47% of revenues derived from telecommunications and networking. However, communications exposure was down from 62% of revenues for all of FY2000. The LTM gross margin, adjusted for depreciation, was satisfactory at 13.6%, but is, in fact, somewhat understated due to the company's practice of marking up assets upon acquisition to market valuation, in conjunction with purchase accounting rules. In contrast to certain of its electronics manufacturing services (EMS) competitors, Viasystems has accounted for all of its acquisitions under the purchase method of accounting.

The ratings are buttressed by the continual improvement in Viasystems' competitive position, which has benefited from the migration of a substantial proportion of the company's printed circuit board fabrication activity to its low cost China facilities. Successful execution within China is strategically important, due not only to China's very low cost labor complement, but also to the increasing importance of local content specified for OEM shipments destined for the Chinese market. Viasystems maintains over 2.3 million sq. ft. of PCB fabrication capacity in Guangzhou and Zhongshan, with additional operations in China, including sites in Shanghai and Nantong, dedicated to backpanel and enclosure assembly. Although the preponderance of production activity has been concentrated in low layer count commodity PCBs, advanced PCB capabilities at Guangzhou have been elevated to eighteen layers count, with plans under way to attain 22 layers count production in early 2002. The company's PCB activity, which commands higher margins that electronics manufacturing services, comprised only 33% of FY2001Q3 revenues, having decreased to $88 million from the peak recorded in FY2000Q4 of $244 million, or by 64%. Yet, the company's performance was remarkable when contrasted with Tier One EMS rival Sanmina, which reported same quarter PCB revenues of $90 million, greater than an 80% decrease from the $460 million peak achieved in the equivalent 2000Q4 period.

The issuance of the 14% senior notes to Hicks, Muse, who continue to be highly supportive, in lieu of any further injection of equity, was ostensibly undertaken to avoid the dilution that would have ensued in light of the depressed market value of Viasystems' outstanding common stock. While the investment, for which interest would accrue through maturity, augments Hicks, Muse's sizable stake in the enterprise, represented by $507 million previously invested cash equity, the further subrogation of the senior subordinated notes does little to engender confidence among the senior subordinated noteholders. Nevertheless, investors and vendors could derive encouragement from the company's current liquidity position, which was abetted by the note proceeds and could be further enhanced by the possible issuance of up to an additional $50 million of notes authorized under the second amendment to the credit facility. As of September 30, liquidity consisted of $27 million in cash, and available borrowing capacity under the revolver, which was restored to about $112 million. Approximately $26.5 million of net cash was provided by operating activities in FY2001Q3, with the $66 million reduction in accounts receivable and $19 million reduction in inventories offset by a $56 million reduction in accounts payable. Inventory turnover improved to 6.1 times in FY2001Q3 while days sales outstanding and days payables outstanding each declined by thirteen days. The current ratio was 1.6. Customers, led by Lucent Technologies, Marconi Communications, Alcatel, Nortel, Siemens, General Electric, Sun Microsystems, Delco and Tellabs, have remained loyal, awarding the company 54 new program wins in 2001.

Viasystems Group, Inc., headquartered in St. Louis, Missouri, has evolved from a manufacturer and marketer of printed circuit boards and custom-designed backpanels for telecommunications, computer, automotive, military and other industrial uses to a leading, full-service provider of electronics manufacturing services.

New York
Robert N. McCreary
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

New York
Howard Sitzer
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (215) 967-6233
SUBSCRIBERS: (215) 967-6233

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