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Rating Action:

MOODY'S RAISES RATINGS ON VIASYSTEMS' SENIOR SUBORDINATED NOTES TO B3 AND ON VIASYSTEMS' GTD SENIOR SECURED BANK CREDIT FACILITIES TO B1; NEW TRANCHE C TERM LOAN FACILITY RATED B1

21 Sep 1999
MOODY'S RAISES RATINGS ON VIASYSTEMS' SENIOR SUBORDINATED NOTES TO B3 AND ON VIASYSTEMS' GTD SENIOR SECURED BANK CREDIT FACILITIES TO B1; NEW TRANCHE C TERM LOAN FACILITY RATED B1 Moody's Investors Service raised its rating to B3 from Caa1 on Viasystems' $500 million 9-3/4% senior subordinated notes, due 2007. At the same time, Moody's assigned a B1 rating to Viasystems, Inc.'s $291 million new tranche C guaranteed senior secured term loan facility, due 2005, and raised the ratings to B1 from B2 on the company's outstanding guaranteed senior secured credit facilities, consisting of $157 million term loans and $244 million revolving credit facilities, of which only $37 million will be drawn with the application of a portion of the proceeds from the recent transaction toward repayment of the amount outstanding under the U.S. revolver. The company's senior implied rating is raised to B1 from B2, completing a review of the company's debt that was commenced July 20, 1999. The ratings outlook is stable.

The ratings upgrade recognizes Viasystems' acquisition of Kalex Printed Circuit Board Ltd., a double-sided and multi-layer printed circuit board manufacturer, and the $200 million equity contribution that will accompany the acquisition. The integration of Kalex, with operations in Guangzhou and Zhongshan, China, into Viasystems' global infrastructure would enable the company to realize dramatically lower wage rates in the production of low cost 2-8 layer commodity printed circuit boards, and compete more effectively with its Asian competitors. However, the company's migration of this business from existing sites in North America and Europe, and the redeployment of much of the company's present capacity to the manufacture of more complex, higher layer count boards, will result in substantially increased capital outlays, as well as delays of indeterminate length as these sites undergo customer qualification.

Nevertheless, Moody's recognizes the wealth of entrepreneurial and operational talent dedicated to implementing Viasystems' business plan, accompanied by the largesse of the company's sponsors, Hicks, Muse, Tate & Furst, who, with this latest transaction, are increasing their stake to $507 million cash equity. The much improved outlook for telecommunications investment worldwide, based on the strengthening Pacific rim economies, the increased demand for wireless communications services, and the rapid growth of the Internet, should augment customer demand in Viasystems' principal end use markets. Recent developments and a fine tuning of the company's business model, which seeks to leverage off of value added assembly services, lead us to believe that the company is in the incipient stages of attaining the global business integration envisioned at its inception three years ago.

Viasystems will be required to make increased capital outlays to successfully transition a large portion of its North American and European capacity to complex printed circuit board production while shouldering a heavy debt to cash flow ratio. From another perspective, pro forma total debt is just about equal to pro forma LTM revenues. Also, pro forma free cash flow coverage is barely attained; the company's balance sheet reflects considerable negative consolidated tangible net worth due to the cumulative goodwill incurred in the acquisitions; and pricing pressure continues in what remains a highly fragmented and largely commodity-oriented printed circuit board business. The company's assessment of its goodwill and acquired intangibles could result in write-offs going forward. Its performance in 1998 was adversely affected by a weak electronics market, a 40% increase in capacity in Taiwan, despite the economic downturn in Asian markets, and the more aggressive pricing policies adopted by Asian manufacturers exposed to currency devaluation.

The ratings additionally reflect the ongoing rationalization of activities among Viasystems' operating units, which include the former Lucent printed circuit board division in Richmond, Virginia, seven sites in the United Kingdom, three locations in Canada, two facilities in Italy, and a major facility in Echt, The Netherlands as well as facilities in Norrkoping, Sweden and Puerto Rico. Viasystems was formed by Hicks, Muse, Tate & Furst and Mills & Partners in August, 1996 as a roll-up of printed circuit board manufacturers and backpanel assemblers. The consolidation of seven separate manufacturing operations starting in October, 1996 has yet to result in the enhanced operating margins anticipated by the company, due largely to the inability of the company to implement a cohesive plan encompassing the European acquisitions. The incumbent management team in Europe failed to take advantage of available cross-marketing and cost reduction opportunities that might have been attained through higher capacity utilization, reduction of high scrap rates, better training, and greater control over wages. Additionally, the company has been plagued by its ownership of significant manufacturing capacity in locations with strong currencies. Viasystems must coordinate the varied production requirements for its major customers among the company's facility locations, which are differentiated by technology, layer count, volume production and type of service.

However, the ratings are supported by the recent management changes implemented by Viasystems resulting from the October, 1998 sale of another Hicks, Muse/Mills & Partners concern, Berg Electronics, to Framatome Connectors International. Several key positions in the company have been filled by individuals formerly affiliated with Berg in the United States and Europe. Berg Electronics, a manufacturer of connectors and cable assembly products, was involved with similar customers and end use markets as Viasystems. Additionally, the company has amassed leading proprietary advanced technologies and process methodology at the former Lucent and Mommers locations. These technologies are being migrated to the company's facilities in Canada and at the new 500,000 square foot Tyneside, England facility. Although heavily weighted in the telecommunications sector, Viasystems serves a premier roster of multinational OEM and electronic manufacturing services customers. As part of its facility acquisitions from Lucent and Ericsson, the company has entered into multi-year supply agreements with the two companies for the provision of printed circuit boards. At relatively modest expense, the company has dedicated a portion of its plants in Richmond, Virginia and Juarez, Mexico as well as facilities in Columbus, Ohio, Nantong, China, and Bolden, England for the purpose of providing surface mount and box build assembly to key customers. This value added assembly infrastructure, enhanced by the April, 1999 acquisition of PAGG Corporation of Milton, Massachusetts outside of Boston, provides an internal source of demand for the company's printed circuit boards and backpanels while delivering a more complete end use solution to the customers.

Although Viasystems will remain highly leveraged with debt equivalent to 4.8 times pro forma LTM EBITDA, a reduction from the 5.4 times ratio recorded in 1998 has been achieved with the partial repayment of borrowings under the company's revolving credit and a $100 million cash collateralization of a portion of the outstanding Chips loan notes. Pro forma EBITA plus lease rentals for the LTM ended June 30, 1999 would have provided about 1.1 times coverage of pro forma fixed charges, including 1999 amortization payments on the term loans and capital leases. Pro forma free cash flow, after deducting estimated 1999 capital expenditures of $123 million, would have been barely sufficient to cover pro forma fixed charges. The company's pro forma return on assets for the LTM ended June 30, 1999, based on EBITA plus rentals, was a satisfactory 9.9%.

Viasystems Inc., headquartered in St. Louis, Missouri, manufactures and markets printed circuit boards and backpanels for telecommunications, computer, automotive, military and other industrial uses.





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