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Rating Action:

MOODY'S REVIEWS FEDERAL-MOGUL Ba2 (SENIOR NOTES) FOR POSSIBLE DOWNGRADE

20 Sep 2000
MOODY'S REVIEWS FEDERAL-MOGUL Ba2 (SENIOR NOTES) FOR POSSIBLE DOWNGRADE

Approximately $4.7 Billion of Debt Securities Affected.

New York, September 20, 2000 -- Moody's Investors Service ("Moody's") placed the ratings of Federal-Mogul Corporation ("Federal-Mogul") under review for possible downgrade. Ratings affected include: (i) the Ba2 ratings on Federal-Mogul's $1.75 billion of senior unsecured bank credit facilities (consisting of a $1 billion revolving credit due 2004, a $400 million ($370 million remaining) term loan A due 2004 and a $350 million ($347 million remaining) term loan B due 2005); (ii) the Ba2 ratings of Federal-Mogul's aggregate $2.325 billion of senior unsecured notes with various maturities; (iii) the B1 rating of Federal-Mogul's $575 million of 7% junior subordinated debentures due 2027 and the corresponding "b1" rating of Federal Mogul's $575 million of guaranteed trust preferred securities; (iv) the "b1" rating of Federal Mogul's preferred stock; (v) the (P)Ba2/(P)B1/(P)"b1" ratings of Federal Mogul's shelf registration for senior debt, subordinated debt and preferred stock, respectively; (vi) the Ba2 senior implied rating; and (vii) the Ba2 senior unsecured issuer rating.

The review action reflects Moody's concerns regarding Federal Mogul's series of senior management changeovers including yesterday's resignation of its Chairman and Chief Executive Officer; changes in strategic direction; inability to meet near-term projections; problems effectively integrating its 18 recently-acquired businesses, rationalizing facilities and generating greater operating efficiencies in an expedient manner; higher-than-expected asbestos settlements; and materially negative impacts on earnings and working capital of several market dynamics including the devaluation of the Euro and significant softening of both the North American aftermarket and the heavy-duty truck market. Management now estimates that Federal Mogul will have a $200 million fiscal year 2000 cash flow shortfall, in contrast to the minimum cash-neutral position it estimated in June 2000 and the positive $200 million cash surplus predicted at the outset of the year.

More positively, the review action also considers Federal-Mogul's continued significant position in the global marketplace, its notable geographic and product diversity and its reputable brands, as well as the company's plans to immediately curtail non-customer related expenses and capital projects and implement various initiatives to improve operating performance through the acceleration of lean manufacturing techniques, expansion of supply chain management and further consolidation of global operations. It was indicated that the search for a new chief executive will focus on individuals who have proven abilities to execute at the operational level.

Federal-Mogul announced that it expects a break-even third quarter ending September 30, 2000 and that fourth quarter earnings will be modestly improved from that level. Earnings per share in 2000 will therefore run materially below management's June 2000 market guidance of $3 per share and initial expectations of $4 per share. Leverage as measured by "total debt/EBITDA" (excluding roughly $420 million in off-balance sheet accounts receivable financing) will approximate 4x for the twelve months ending December 2000 and EBITA coverage of interest and asbestos payments will likely fall below 2x. Federal Mogul's EBITA return on assets is substandard for its rating category at about 9%.

Moody's review will consider several factors including our evaluation of the ability of the interim chief executive and Board of Directors to refocus the business on programs that will reduce debt and improve leverage and interest coverage and upgrade the company's ability to forecast results; our confidence that an effective permanent chief executive candidate will be identified in a timely fashion; and refined quantification of the downside remaining in the aftermarket as well as foreign currency exposure. We will additionally look to gain more feedback on the company's expected ongoing liquidity, potential asset sales and conclusions of an updated asbestos actuarial study that will be conducted shortly.

Federal-Mogul Corporation, headquartered in Southfield, Michigan, is a global manufacturer and distributor of a broad range of vehicular components for automobiles and light trucks, heavy duty trucks, farm and construction vehicles and industrial products. Customers include both original equipment manufacturers and aftermarket distributors.

New York
Tom Marshella
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: (212) 553-0376
SUBSCRIBERS: (212) 553-1653

New York
Lisa B. Matalon
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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