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Rating Action:

Moody's rates AREP Car Acquisition Corp.; Corporate Family, B2

11 May 2007
Moody's rates AREP Car Acquisition Corp.; Corporate Family, B2

Stable outlook on $3.6 billion of obligations

New York, May 11, 2007 -- Moody's Investors Service has assigned a B2 corporate family rating to AREP Car Acquisition Corp. ("Lear Newco"), the corporate entity that will be established to affect the consummation of the proposed acquisition and subsequent merger of Lear Corporation ("Lear") into a subsidiary of American Real Estate Partners, L.P. ("AREP"). At the same time, the rating agency confirmed Lear's existing ratings consisting of a B2 corporate family rating, B3 senior unsecured notes, and B2 secured bank term loan. The rating outlooks for , and revised Lear and Lear Newco's outlook to are stable from ratings under review for possible downgrade. Lear Newco's B2 rating considers the substantial leverage deployed in its prospective capital structure, adequate interest coverage and modest expectations for free cash flow. Furthermore, the ratings incorporate the ongoing strengths, and accompanying risk elements, in the underlying operating business of Lear, which is a global leader in automotive seating and electrical distribution systems. Moody's assigned B2 ratings to Lear Newco's $3.6 billion of secured bank credit facilities, and a Speculative Grade Liquidity rating of SGL-2, and a stable outlook.

As Lear's shareholders have yet to vote on the acquisition proposal from AREP, an affiliate of Mr. Carl C. Icahn, Moody's will maintain separate ratings on Lear and ratings on Lear Newco on an interim basis. Should the merger and related financing be completed as currently structured, which is expected towards the end of the second quarter, ratings on Lear would be withdrawn. Although Lear would be the surviving corporation, it would be under different ownership and have a new board of directors and a different capital structure. In time, Lear Newco will be re-named Lear Corporation.

The acquisition is valued at roughly $5 billion net of cash on hand. AREP will invest some $1.3 billion in equity and arrange a $2.6 billion secured bank term loan with a maturity in 2014 and a $1.0 billion secured revolving credit facility with a maturity in 2012, which is expected to be un-drawn at closing. Approximately $1.3 billion of existing unsecured Lear notes and some $89 million of other Lear debt would remain outstanding as obligations of Lear Newco.

"Although the acquisition will involve considerable financial leverage and interest burden, Lear's global scale, market share, and anticipated progress in diversifying its customer base and restoring its operating margins establish a financial profile that remains consistent with the B2 rating category" said Ed Wiest, Vice President & Senior Analyst at Moody's.

The leveraging effect of the acquisition of Lear is viewed as a negative credit event by Moody's. Yet, because of the progress that the company has made in recent months to improve its operating performance, pro forma financial metrics for the acquisition are expected to remain at levels consistent with the B2 Corporate Family Rating. In particular, Moody's noted that Lear has completed the divestiture of its North American interior business which had substantially negative EBITDA in 2006 and was a factor in the company's negative free cash flow over the past few years. Effectively, the elimination of this loss making unit was a de-leveraging event for Lear. Although Lear maintains a minority interest in the business, it will no longer be burdened by the large cash losses. Under certain contingencies, however, Lear may be called upon to contribute up to an additional $40 million to the venture. Despite lower production volumes at its principal North American customers, Lear reported results above expectations in the first quarter of 2007. Positive contributions from its operations outside of North America, the roll-out of new business awards, and savings from its restructuring actions offset weakness on key platforms in its largest market. The company raised guidance on its core operating earnings for 2007. Consequently, Moody's confirmed existing Lear ratings and restored a stable outlook.

Lear Newco's Corporate Family Rating of B2 considers its leveraged capital structure, margins which have been under stress from lower North American vehicle production and elevated raw material costs, and limited free cash flow anticipated over the intermediate term. The rating incorporates favorable attributes of substantial scale, strong global market share, resultant operating efficiencies, and a good liquidity profile. It further reflects increasing customer and geographic diversification and a footprint that enables participation in growth markets outside of mature regions of North America and Western Europe. Lear Newco's EBITA margins of under 4%, pro forma debt/EBITDA of around 5.5 times, and EBITA/interest coverage of 1.3 times, are typical of single B credits. In addition, the B2 rating emphasizes current pressures within the cyclical automotive industry, and, importantly, Lear's ongoing exposure to General Motors ("GM" with 29% of global revenues in 2006) and Ford Motor Company ("Ford" with 17%). In part, this pressure arises from lower volumes in Ford and GM's truck and SUV models on which Lear historically has had significantly higher content per vehicle. Over time, new business awards and restructuring initiatives are expected to grow revenues, enhance customer diversification, and contribute to healthier margins.

Lear Newco's stable outlook flows from its prospects for modest free cash flow, solid liquidity, extended debt maturity profile, and expectations of a gradual improvement in operating margins, customer and geographic diversification. However, the company faces a challenging environment in North America, including recent weak new vehicle sales trends and potential disruption to customer production should OEM negotiations with the UAW not lead to a smooth contract renewal in September 2007, and recent weak new vehicle industry sales. Its performance will continue to be exposed to commodity costs, trends in North American consumer interest for light trucks given its current vehicle/platform mix, and developments in GM's and Ford's North American market shares.

Lear Newco's Speculative Grade Liquidity rating is SGL-2 and represents good liquidity over its initial year of operations. The rating is based upon expectations of modest free cash flow, a $1 billion un-drawn revolving credit facility with material headroom under applicable financial covenants and a favorable debt maturity profile.

Moody's confirmed Lear's existing B2 corporate family rating and revised the outlook to stable from ratings under review for possible downgrade. The review was initiated on February 5, 2007 in response to announcements that Lear's Board of Directors had accepted a proposal from AREP to be acquired and was focused on the prospective changes to Lear's credit metrics and capital structure which a leveraged acquisition implied. The terms of the acquisition financing have now been assessed as well as their impact on existing Lear obligations. In addition, Lear has completed the divestiture of its North American interior business and reported its first quarter results. The interior unit had substantially negative EBITDA in 2006 and was a factor in Lear's negative free cash flow over the past few years. Effectively, its disposition was a de-leveraging event for Lear although there are certain contingencies in which Lear may have to contribute up to an additional $40 million. Despite lower production volumes at its principal North American customers, Lear reported results above expectations in the first quarter of 2007. Positive contributions from its operations outside of North America, the roll-out of new business awards, and savings from its restructuring actions offset weakness on key platforms in its largest market. The company raised guidance on its core operating earnings for 2007. Consequently, Moody's confirmed existing Lear ratings and restored a stable outlook.

Ratings assigned:

AREP Car Acquisition Corp.

Corporate Family, B2

Senior Secured Term Loan, B2 (LGD-3, 44%)

Senior Secured Revolving Credit Facility, B2 (LGD-3, 44%)

Outlook, stable

Speculative Grade Liquidity rating, SGL-2

Ratings confirmed:

Lear Corporation

Corporate Family, B2

Senior Secured Term Loan, B2 (LGD-4, 50%)

Senior Unsecured Notes, B3 (LGD-4, 61%)

Shelf ratings for senior unsecured, subordinated and preferred, (P)B3, (P)Caa1(LGD-6, 97%), and (P)Caa1 (LGD-6, 97%) respectively

Speculative Grade Liquidity rating, SGL-2

Ratings revised:

Lear Corporation

Outlook stable from ratings under review for possible downgrade

Should the acquisition be approved by Lear's shareholders and upon consummation of the merger, Lear's existing 8.75% notes, 8.5% notes, and 5.75% notes transition to obligations of Lear Newco as Lear will be the surviving corporation. Their ratings would be unchanged at B3, but their Loss Given Default Assessments would be LGD-4, 63%.

Indentures for unsecured notes constrain Lear's and its guaranteeing subsidiaries' ability to grant collateral interests without ratably securing the notes. Existing Lear notes maturing in 2008 and 2009 were issued under indentures which had tighter lien baskets than Lear's other unsecured notes. Under those same indentures, Lear has the option to redeem the notes at any time under certain conditions. Lear will be obligated to redeem, or provide satisfactory notice that it has irrevocably called those notes (a condition precedent for the acquisition financing). The surviving indentures applicable to Lear Newco will generally provide for a lien basket of 10% of defined consolidated assets compared to the 5% basket under the indenture for the 2008 and 2009 notes.

The last rating action was on February 5, 2007 at which time Lear's ratings were placed under review for possible downgrade.

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 $17.6 billion in 2006 and has more than 90,000 employees in 33 countries. Following the disposition of its interior business, Lear expects its ongoing revenues in 2007 to approximate $14.8 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
Edwin Wiest
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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