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Rating Action:

Moody's assigns B3 Corporate Family Rating and provisional (P)B3 Bond Rating to TMD Friction -- Outlook stable

05 May 2010

Approximately EUR 160 million of rated debt affected

Frankfurt, May 05, 2010 -- Moody's Investors Service has assigned a B3 Corporate Family Rating (CFR) and a B3 Probability of Default Rating (PDR) to TMD Friction Group S.A. ("TMD"). At the same time, Moody's has assigned a provisional P(B3) rating to the proposed EUR 160 million Senior Secured Notes. The rating outlook is stable.

The B3 Corporate Family Rating reflects TMD's (i) strong position in the original equipment and aftermarket for automotive brake pads and linings, (ii) a large share of revenues generated in the usually more resilient aftermarket, (iii) a strong technology which allows supplying OEM customers worldwide despite varying product requirements in different regions, (iv) established and solid relationships with automobile manufacturers and auto equipment suppliers, and (v) an enhanced cost base on the back of successful rationalization and cost reduction initiatives in recent years. The rating also considers the earnings recovery in the second half of 2009 which continued in the first quarter of 2010. In H2 2009, TMD achieved reported EBITDA of EUR 26.5 million compared to EUR 0.7 million in H1 2009 (before restructuring costs and Moody's standard adjustments). Furthermore, the rating reflects our understanding that TMD's major shareholder - private equity firm Pamplona Capital Management - is willing to support future external growth also with new equity and supports a target leverage ratio of 2.5-3.5x Net Debt/EBITDA (before Moody's standard adjustments).

The rating is, however, constrained by a limited diversification in terms of geography (more than 80% of 2009 revenues were generated in Europe) and product scope. In addition, there is strong competition among suppliers in the market for automotive original equipment ("OEM") which is also strongly exposed to the overall economic environment. Although TMD's aftermarket business, which comprises original replacement parts sold through OEM dealerships ("OES") and TMD branded or private label parts sold through independent garages or repair shops ("IAM"), is more resilient, the recent recession has shown that these activities are not immune to the overall economic environment. This is also evidenced by a revenue decline of -7% in 2008 and -17% in 2009 on a group level. Moreover, the company is exposed to raw material price fluctuations (e.g. steel, copper, chemicals) and it might be challenging to recover increasing input costs from customers in a timely fashion. Though Moody's notes that the company was reorganized and recapitalized in 2009, these challenges combined with a highly leveraged capital structure also resulted in a financial restructuring of TMD in 2006 and eventually forced the company into insolvency in late 2008.

Moody's rating assessment is based on the expectation that TMD can broadly sustain the performance shown in the second half of 2009 and the first quarter of 2010 which should result in EBITDA for the full year 2010 in the range of EUR 50 million (before restructuring costs and Moody's standard adjustments) and Debt/EBITDA towards 4x (as adjusted by Moody's). While this leverage ratio would position the rating adequately in the single-B rating category, Moody's notes that the capital structure following the proposed bond issue will be debt weighted given the intended use of proceeds (see below).

The proposed EUR 160 million Senior Secured Notes will be issued by TMD Friction Finance S.A., a fully owned subsidiary of TMD Friction Group S.A. The proposed notes will benefit from upstream guarantees of operating subsidiaries that account for 80% of 2009 revenues and 79% of 2009 EBITDA. The proposed notes will further benefit from tangible collateral in form of (i) certain fixed assets of guarantors in Germany and the UK, (ii) certain inventory of guarantors in Germany, France and the UK, and (iii) trade receivables of guarantors in the UK but not France and Germany (as French and German receivables would potentially be used for a receivable discounting facility).

Apart from the proposed Senior Secured Notes there will only be small amounts of local overdraft facilities and finance lease in TMD's debt structure. While the proposed financing structure is essentially an 'all bond' structure, we believe a family recovery rate of 50% (Moody's standard assumption for debt structures including bond and bank debt) is the most appropriate assumption for applying Moody's Loss-Given-Default Methodology. This view is based on our estimate of a distressed enterprise value in case of default. Given these assumptions Moody's Loss-Given-Default Methodology results in a (P)B3 instrument rating for the EUR 160 million Senior Secured Notes. This provisional (P)B3 rating is based on draft documentation received so far and subject to our satisfactory review of final documentation.

The proceeds of EUR 160 million are planned to be used (i) for a distribution of approximately EUR 132 million to Pamplona Capital Management by way of refinancing existing shareholder loans plus accumulated interest, (ii) as additional liquidity of approximately EUR 18 million and (iii) to cover transaction expenses.

In this context Moody's notes that, absent any material committed credit facility, TMD's liquidity position is limited to cash on hand (EUR 65 million per the end of 2009 and EUR 40 million per the end of March 2010) and we caution that prospects for material positive Free Cash Flow generation remain limited in our view given the interest payments on the proposed EUR 160 million Senior Secured Notes.

Assignments:

..Issuer: TMD Friction Finance S.A.

....Senior Secured Regular Bond/Debenture, Assigned (P)B3, LGD3, 47%

..Issuer: TMD Friction Group S.A.

....Probability of Default Rating, Assigned B3

....Corporate Family Rating, Assigned B3

This is the first time that Moody's has rated this company.

The principal methodology used in rating TMD was Moody's Global Auto Supplier Industry Methodology, published in January 2009 and available on www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody's website.

TMD is a manufacturer of brake pads and linings based in Luxembourg. The company generated EUR 530 million of revenues in 2009. Thereof 40% of 2009 were generated by the IAM segment, 31% by OES and 29% by OEM. While expanding abroad TMD is strongly reliant on the European home market which accounted for 83% of 2009 revenues. TMD was bought by Pamplona Capital Management out of an administration process in April 2009. TMD's management also holds an equity interest in the company.

Paris
Eric de Bodard
Managing Director
Corporate Finance Group
Moody's France S.A.
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Frankfurt
Rainer Neidnig
Asst Vice President - Analyst
Corporate Finance Group
Moody's Deutschland GmbH
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's assigns B3 Corporate Family Rating and provisional (P)B3 Bond Rating to TMD Friction -- Outlook stable
No Related Data.
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