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Rating Action:

MOODY'S RAISES LEAR CORPORATION'S SENIOR UNSECURED RATING TO Baa3; OUTLOOK STABLE

03 May 2004
MOODY'S RAISES LEAR CORPORATION'S SENIOR UNSECURED RATING TO Baa3; OUTLOOK STABLE

Approximately $3.2 Billion of Debt Securities Affected.

New York, May 03, 2004 -- Moody's Investors Service has raised the senior unsecured long-term debt rating of Lear Corporation (Lear) to Baa3 and moved the rating outlook to stable.

The upgrade reflects Lear's strong free cash flow generating ability, its $4 billion plus of net new business awards over the next five years and the company's ability to strengthen its financial flexibility despite operating in a highly cyclical industry and an uncertain global economy. The action also incorporates the company's low fixed cost structure relative to its peers, its emergence as a complete interior systems integrator and its position at the forefront of a growing trend toward increasing content per vehicle. These positive factors are partially offset by Lear's heavy reliance on the North American-based automakers, ongoing pricing pressure from OEMs and the high leverage position stemming from multiple debt-financed acquisitions over the past decade.

Moody's notes that Lear's senior notes and its bank facility both benefit from upstream guarantees from various operating subsidiaries, with the banks also secured by the stock of certain operating subsidiaries. The rating agency believes that this structure does not afford any material difference in the degrees of protection for note holders and bank creditors. Moody's furthermore anticipates that if the current structure of guarantees and security changes, the relative parity of note and bank creditors will be preserved.

The stable rating outlook encompasses Moody's expectation that Lear will continue to outperform its industry peers and generate solid levels of free cash flow for further debt reduction despite potentially flat-to-down global light-vehicle build-rates in 2004.

Ratings upgraded:

Lear Corporation -- Baa3 senior implied rating from Ba1; Baa3 issuer rating from Ba1; Baa3 for senior unsecured notes, senior unsecured convertible notes, senior unsecured eurobonds and the revolving credit facility from Ba1, and (P)Baa3/(P)Ba1/(P)Ba2 for senior unsecured, subordinated and preferred issues to be issued under the 415 shelf registration from (P)Ba1/(P)Ba2/(P)Ba3.

The rating actions also acknowledge Lear's recent announcement regarding the purchase of the German-based electrical components company, Grote & Hartmann for approximately $220 million. Moody's believes the acquisition should improve customer and geographic diversification as well as enhance Lear's electronic and electrical capabilities. In addition, the purchase price represents approximately half of Lear's typical free cash flow generation for a year, which is reasonable and should not materially impact the positive trend in credit metrics. Additionally, the rating agency notes that the ongoing SEC investigation has not yielded any major, negative results to this point. Moody's adds that it doesn't expect substantially negative news; however it will closely monitor the progress and outcome, the timing of which is uncertain.

Lear's focus on cash generation in the midst of a challenging operating environment has enabled the company to pay down approximately $1.5 billion in debt since the acquisition of UT Automotive in 1999. During fiscal 2003, the company generated free cash flow of $509 million (excluding the impact of the accounts receivable securitization program). However, Moody's recognizes that this level was temporarily inflated due to the timing of customer receipts at the end of the year. The rating agency notes that Lear's free cash flow generation typically hovers around $400 million a year and should approach that level again in 2004. Year-over-year improved financial measures include adjusted debt excluding pension-to-EBITDAR of 2.56x from 2.99x, free cash flow-to-adjusted debt excluding pension of 17% from 12% and EBIT-to-cash interest of 4.07x from 3.34x. Balance sheet debt-to-capitalization at the end of 2003 improved to 47.4%, down from 56.0% at year end 2002. On an adjusted debt basis, which includes the securitization/factoring programs, guarantees, the underfunded pension position and a modified present value of operating leases, Lear's leverage position increases to 57.8%.

Lear 's net new business awards are well diversified by product, customer and geographic region and will provide $4.4 billion in incremental revenues over the next five years, including approximately $750 million in 2004. In addition, the company's favorable variable cost structure represents a significant competitive advantage in providing operating flexibility for managing through fluctuations in industry demand and economic cycles. Lear also continues to prosper from the growing trend toward increasing content per vehicle and OEM reliance on Tier I suppliers to take on more responsibility in the production process. The company has positioned itself, largely through acquisitions, as a complete interior systems provider and integrator, which should lead to an increase in content per vehicle on a global basis. Greater penetration into transplant relationships is reaping benefits as net new business awards come online. Nonetheless, despite the well-diversified net new business award total, Lear's current reliance on the Big 3 is of some concern, especially in light of transplant pressure on their competitive positions in North America.

Lear's liquidity overview includes two credit agreements, a $1.7 billion facility and a $250 million facility, both of which have identical credit agreement language. The $1.7 billion revolving credit facility matures in March of 2006 with the $250 million facility maturing this month. At March 31, 2004, there were no outstandings under the revolvers. Both facilities require one business day's notice for obtaining U.S. dollar funds and are subject to Material Adverse Change (MAC) provisions at each borrowing. In addition, the facilities contain manageable covenants including interest coverage and a consolidated leverage ratio. Currently, the company has ample breathing room under its covenants. The debt maturity schedule is favorable in the short-term, however the $600 million bond related to the UT Automotive acquisition coming due in 2005 will need to be addressed. As of the end of the first quarter of 2004, the balance sheet showed cash and cash equivalents of approximately $147 million. Moody's notes that Lear has not identified any ratings triggers that would require significant cash calls on the company's cash flows or current cash position.

Lear Corporation, headquartered in Southfield, MI, is the world's sixth largest automotive supplier providing complete automotive interior capabilities to the world's major OEMs.

Michael J. Mulvaney
Managing Director
Corporate Finance Group

New York
George A. Meyers
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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