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Rating Action:

Moody's affirms Lear's B2 rating; outlook negative; Speculative Grade Liquidity Rating to SGL-3

14 Oct 2008
Moody's affirms Lear's B2 rating; outlook negative; Speculative Grade Liquidity Rating to SGL-3

New York, October 14, 2008 -- Moody's Investors Service affirmed the B2 corporate family and probability of default ratings of Lear Corporation ("Lear"), but lowered the company's Speculative Grade Liquidity Rating to SGL-3 from SGL-2. In a related action, Lear's outlook was changed to negative. The rating action is based on the company's recent announcement that it has further lowered its 2008 earnings guidance as a result of deteriorating and volatile industry and general economic conditions. Lear reduced its full-year 2008 sales outlook from $15 billion to approximately $14 billion and now sees its core operating earnings down approximately 20% from its previous guidance of $550 million to $600 million issued on July 29, 2008. While Lear continues to anticipate free cash flow to be positive, Moody's believes it will be meaningfully lower than the $150 million expectation in the company's previous guidance. Moody's expects the weakening automotive production environment to adversely impact Lear's operating metrics and could constrain the magnitude of cushion under the financial covenants in the company's bank credit facility over the next twelve months.

The negative outlook considers that while the company currently maintains good credit metrics for the assigned rating, these metrics will likely moderate due to the severe erosion in industry fundamentals over the near-term. Lear's revised guidance reflects declining North American vehicle sales and production, the shift in product mix to smaller passenger vehicles in the U.S., and the lower automotive OEM production in Europe. The outlook also considers that while Lear has successfully implemented restructuring programs in the past, the current industry environment continues to evolve, posing additional execution risk.

Developments that could lead to a stabilized outlook include stabilization of industry conditions, OEM market shares in North America, and restructuring actions at Lear, resulting in margins which would result in debt/EBITDA sustained below 4.5 times, or EBIT/Interest coverage sustained at 2 times.

Developments that could lead to lower ratings include recurring negative free cash flow, deterioration in margins leading to debt/EBITDA sustained above 6 times, or EBIT/Interest coverage sustained below 1.3 times.

Lear's Speculative Grade Liquidity rating of SGL-3 indicates adequate liquidity over the next twelve months. At June 30, 2008, Lear's principal liquidity sources included cash balances of approximately $624 million, with about one-third of this is located domestically, and about another one-third is available internationally. Moody's expects Lear's ability to generate positive free cash flow over the next twelve months to be challenged by the current industry environment. The company's liquidity profile includes a Euro 315 million factoring facility which expires in April 2011 and a $1.29 billion revolving credit facility. Approximately $822 million of the revolving credit facility matures in January 2012; while approximately $468 million is due in March 2010. These facilities were undrawn at June 30, 2008 with $61 million of letters of credit outstanding. Lear currently has ample room under the credit facility's covenants with leverage and interest ratios of 2.1 times and 4.8 times compared to the covenant thresholds of 3.5 times and 2.75 times, respectively. However, the combination of current industry OEM production pressures, which are expected to continue into 2009, and the tightening of these covenants over the near-term are expected to reduce the company's current covenant cushions. The bank debt is secured by the capital stock of all the company's domestic subsidiaries and a portion of the first tier foreign subsidiaries, and certain domestic assets subject to the 10% lien limitation within the company's bond indentures, above these levels collateral must be shared with the bonds. Alternate liquidity is further limited by the terms of the bank debt.

Ratings Lowered:

Speculative Grade Liquidity Rating, to SGL-3 from SGL-2

Ratings Affirmed:

Corporate Family Rating, B2

Probability of Default, B2

Senior Secured Term Loan, B1 (LGD3, 42%)

Senior Unsecured Notes, B3 (LGD4, 58%)

Lear Corporation, headquartered in Southfield, MI, is focused on providing complete seat systems, electrical distribution systems and various electronic products to major automotive manufacturers across the world. The company had revenue of $16.0 billion in 2007 and employed approximately 91,000 employees in 34 countries. Following the disposition of its interior business, Lear expects its ongoing revenues to approximate $14.0 billion.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Timothy L. Harrod
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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