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Rating Action:

MOODY'S RATES HAYES WHEELS' PROPOSED SR. SUB. NOTES B3 AND NEW BANK FACILITY B1; EXISTING SR. NOTES DOWNGRADED TO B2. MOODY'S CONFIRMS B3 RATING FOR MOTOR WHEEL'S SR. NOTES.

19 Jun 1996
MOODY'S RATES HAYES WHEELS' PROPOSED SR. SUB. NOTES B3 AND NEW BANK FACILITY B1; EXISTING SR. NOTES DOWNGRADED TO B2. MOODY'S CONFIRMS B3 RATING FOR MOTOR WHEEL'S SR. NOTES. New York, 06-19-96 -- Moody's Investors Service assigned a B3 rating to Hayes Wheels' proposed $250 million issue of 10-year non-amortizing senior subordinated notes and a B1 rating to its new $645 million bank credit facility. Moody's also downgraded Hayes Wheels' existing senior notes to B2 and confirmed Motor Wheel Corporation's senior notes at B3.
Net proceeds, together with $200 million in new cash equity, will be used to pay for the merger of Hayes Wheels and Motor Wheel in a cash and stock transaction; to fund a tender offer for Hayes Wheels' existing senior notes; to redeem Motor Wheels' senior notes; and for working capital. Once the merger is completed, Motor Wheel will become a subsidiary of Hayes Wheels. When and if the tender offer for Hayes Wheels' notes and redemption of Motor Wheel's notes are substantially completed, Moody's said it would withdraw the applicable ratings.
This concludes a review for possible downgrade of Hayes Wheels' existing senior notes (which were rated Ba2) and a review with direction uncertain of Motor Wheel's senior notes, which were initiated March 29, 1996, following the announcement of the proposed transactions.
The ratings reflect high financial leverage, substantial intangibles, demand cyclicality, high customer concentration and OEM pricing pressure. Mitigating factors include leading market positions, favorable demand trends and potential cost synergies. The bank loan rating gives only nominal weight to the security collateral due to weak asset coverage. The rating outlook is stable.
The company is subject to high financial risk. With total indebtedness of $703 million and stockholders' equity of $23 million, pro forma total debt-to-total book capitalization was about 97% at April 30, 1996. After deducting approximately $325 million in goodwill and other intangibles (29% of total assets), tangible stockholders' equity was deeply negative. If stockholders' equity is based on the valuation of Hayes Wheels' shares in the merger, the implied total debt-to-market capitalization is a more comfortable 66%. Pro forma total debt-to-EBITDA (giving effect to Motor Wheel's rationalization plan and certain cost savings) stood at 4.4-times and EBITDA-to-cash interest coverage was 2.3-times for the 12-months ended January 31, 1996.
Hayes Wheels enjoys a leading market presence in all segments of steel and aluminum wheel manufacturing in North America and Europe. It has a solid position as a supplier of brake components to OEMs and, increasingly, Tier I brake-systems suppliers. As a low cost and technologically-advanced manufacturer of a broad line of wheels, it stands to benefit from growing use by OEMs of globally-based suppliers of non-core components and systems. Opportunities for additional market share are promising as GM still manufacturers about half of its own requirements and Ford 60%. With consumers favoring lighter, more stylized, wheels, the company is well positioned to benefit from a growing use of aluminum wheels, especially in Europe, where penetration lags the level in North America. A new market may be emerging in the U.S., where aluminum wheels are starting to be used for heavy-duty trucks.
The merger combines Hayes Wheels, which has had good returns over the last three years, with the smaller and much weaker Motor Wheel, which has lost money over the last five years. Motor Wheel has been plagued by a sharp decline in demand for steel wheels. Even before the merger announcement, Motor Wheel had already implemented a series of cost-cutting moves, such as shuttering redundant facilities. The merger should provide additional cost synergies as well as opportunities for cross-selling. Achieving an acceptable level of profitability for the combined company will depend not only on realizing anticipated cost reductions, but on retaining the benefits in the face of OEM pressure for annual cost reductions.
Demand for the company's products is highly cyclical, with about 85% of pro forma sales derived from automotive and truck OEMs and the balance from trailer manufacturers. A growing presence in Europe could serve to moderate some of the cyclicality. Although the company serves a wide variety of OEM customers, concentration is high with 72% of pro forma sales from Ford, Chrysler and GM. Prolonged work stoppages at any of these could cause earnings to fall. Exposure to labor unions after certain Motor Wheel facilities are closed is expected to be about 20%. In its brake-components business, Motor Wheel is increasingly a Tier II supplier to brake systems suppliers, who might exert even greater pressure on margins. The company is vulnerable to aluminum price increases, the passthrough of which could lag by several months, but forward contracts are employed to hedge the risk.
The new notes are guaranteed on a senior subordinated basis by the company's domestic subsidiaries. The proposed bank credit facility comprises a 6-year $220 million reducing revolving credit facility priced at Libor plus 2.5%; a 6-year $200 million tranche A amortizing term loan priced at Libor plus 2.5%; a 7-year $125 million tranche B amortizing term loan priced at Libor plus 3.0%; and an 8-year $100 million tranche C amortizing term loan priced at Libor plus 3.5%. The loans are ratably guaranteed by all of the company's domestic subsidiaries and secured by substantially all assets of domestic subsidiaries and the company (including 100% of domestic subsidiary shares and 65% of foreign subsidiary shares).
Liquidity will be provided primarily by cash flow and the revolver. Debt amortization over the next few years is moderate and additional flexibility is available through a modest level of maintenance capital expenditures.
Hayes Wheels International, Inc., based in Romulus, Michigan, is a leading global supplier of steel and aluminum wheels and brake components to OEMs of passenger cars, light trust and commercial highway vehicles in North America and Europe. Upon completion of the merger, an affiliate of Joseph Littlejohn & Levy will own about 43% of the company. Motor Wheel Corporation, headquartered in Okemos, Michigan, is a major supplier of steel wheels and brake components to the auto and heavy-duty truck and trailer industries.

No Related Data.
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