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Rating Action:

Moody's affirms Lear's Ba2 rating; outlook revised to positive

Global Credit Research - 17 Jan 2014

Approximately $2.1 billion of debt obligations affected

New York, January 17, 2014 -- Moody's Investors Service affirmed the Ba2 Corporate Family and Ba2-PD Probability of Default ratings of Lear Corporation (Lear) and raised the rating outlook to positive from stable. In a related action Moody's affirmed Lear's other ratings, including the senior unsecured notes rating at Ba2 and the Speculative Grade Liquidity Rating at SGL-1.

Ratings affirmed:

Corporate Family Rating, at Ba2;

Probability of Default Rating, at Ba2-PD;

Senior unsecured notes due 2018, at Ba2 (LGD4 60%);

Senior unsecured notes due 2020, at Ba2 (LGD4 60%);;

Senior unsecured notes due 2023, at Ba2 (LGD4 60%);

Speculative Grade Liquidity Rating, at SGL-1

RATINGS RATIONALE

Lear's affirmation and positive rating outlook incorporate Moody's belief that the company should demonstrate continued free cash flow generation and some further margin improvement over the intermediate-term even as the growth in North American auto sales begins to level off. The positive rating outlook is also supported by Lear's strong credit metrics with Debt/EBITDA of 1.9x (inclusive of Moody's standard adjustments) for the LTM period ending September 28, 2013 and EBITA/Interest of 6.5x. These metrics are supportive of higher ratings, yet the rating action balances these strengths against the company's moderate margin level and recent shareholder return initiatives.

Lear's EBITA margins of 4.9% for the LTM period ending September 28, 2013 (inclusive of Moody's standard adjustments) continues to lag other similarly rated companies. This result captures a divergent trend between Lear's seating business which offers lower margins and represents about 74% of revenues for year-to-date September 28, 2013, and the electrical power management systems ("EPMS") which accounts for about 26% of revenues and offers higher margins. While revenues in both business segments have exhibited growth over recent years, the seating business' profit margins have been adversely impacted by launch costs on new business, ongoing customer price reductions, and restructuring actions in certain geographic regions. The positive outlook reflects management's expectation that profit margins will improve in the seating business to the high 5% range by year-end 2014, reflecting improving performance and lower new platform launch costs.

Lear's free cash flow generation and strong capital base have supported high levels shareholder friendly activities over the past year, including dividend payments and an accelerated share repurchase program, while also supporting capital reinvestment in its business units. The company has faced pressures from activist investors and a standstill agreement with one group expires in December of 2014. As North American automotive growth trends taper off, Lear's ability to continue to support shareholder return initiatives while sustaining financial metrics and a strong capital structure will be important considerations in any potential for a higher rating.

The SGL-1 Speculative Grade Liquidity Rating continues to indicate the expectation of a very good liquidity profile over the next twelve months supported by strong cash balances, positive free cash flow generation, and availability under the proposed revolving credit facility. As of September 28, 2013, Lear maintained approximately $0.9 billion of cash and cash equivalents. Liquidity is also supported by a $1 billion revolving credit facility maturing in 2018 which was unfunded as of September 28, 2013. Financial covenants under the revolving credit facility include a debt leverage test and an interest coverage test both of which are expected to have ample headroom over the next twelve months. Moody's anticipates that Lear will generate positive free cash flow over the next twelve months, consistent with the company' recent performance. Lear's liquidity profile should support the existing the $750 million remaining amount under the company's share repurchase program if executed on a measured pace consistent with historical trends. More aggressive shareholder return initiatives could utilize liquidity and constrain upside in the rating.

Future events that have the potential to drive Lear's rating higher include: increasing EBITA margins approaching 6%, sustaining Debt/EBITDA under 2.0x and EBIT/Interest coverage, inclusive of restructuring charges, over 4.5x. These metrics incorporate executing organic and acquisitive growth initiatives and executing balanced shareholder return policies.

Future events that have the potential to drive Lear's outlook or rating lower include acquisitions or shareholder return initiatives that are transacted in a more aggressive fashion than has been demonstrated by the company; or an inability to adapt its cost structure to any deterioration in global automotive demand resulting in erosion of margins or cash flow. Lear's outlook or rating could be lowered if EBITA margins approach 4%, EBITA/Interest approaches 4x, or Debt/EBITDA increases to over 2.5x.

The principal methodology used in this rating was the Global Automotive Supplier Industry published in May 2013. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

Lear Corporation, headquartered in Southfield, MI, is one of the world's leading suppliers of automotive seating and electrical power management systems. The company had net sales of $15.3 billion for the LTM period ending September 29, 2013.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Timothy L Harrod
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Michael J Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's affirms Lear's Ba2 rating; outlook revised to positive
No Related Data.

 

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