Moody's rates Lear unsecured notes B3
$700 million of new issuance
New York, November 20, 2006 -- Moody's Investors Service has assigned a B3, LGD4, 61%
rating to Lear Corporation's ("Lear") new offering of $700 million
of unsecured notes. At the same time, Moody's affirmed Lear's
Corporate Family Rating of B2, Speculative Grade Liquidity rating
of SGL-2 and negative outlook. All other long term ratings
The new unsecured notes will consist of a $300 million issue with
a seven year maturity and a $400 million issue with a ten year
maturity. Both issues will benefit from upstreamed guarantees from
the identical set of subsidiaries which guarantee its secured bank debt
and its other unsecured notes. Lear will use the proceeds from
the new notes to tender for all of its outstanding Euro 237 million (approximately
$304 million) notes due in 2008. The remainder of the proceeds
will be used to repurchase a portion of its 2009 notes, of which
$593 million in aggregate principal were outstanding in mid-November.
Both the 2008 and 2009 issues are unsecured obligations. Should
the tender and repurchase be successful, there would be no material
increase in the level of Lear's indebtedness. Depending upon the
coupon established on the new notes, interest expense may change,
but no significant variance is anticipated. The financing will
also extend the company's debt maturity profile.
Lear's Corporate Family rating of B2 considers weak scores under the Auto
Supplier methodology for profitability, leverage and cash flow variability
which have evolved over the last 18 months. Lear's EBIT margins,
currently 2.3% on an LTM basis, and its EBIT/interest
coverage of 1.4 times are more characteristic of single B credits.
Nonetheless, the methodology would suggest a higher rating from
strong scores for substantial scale, leading global market share,
operating efficiencies, improved liquidity, and increasing
customer and geographic diversification. The methodology also recognizes
healthier scores for Lear's reinvestment rate in support of new business
awards. Those awards are expected to grow revenues and enhance
customer diversification over time. However, the B2 rating
emphasizes current pressures within the cyclical automotive supplier industry,
the company's elevated leverage, and, importantly, Lear's
ongoing dependence upon revenues with General Motors ("GM" with 28%
of global revenues in 2005) and Ford Motor Company ("Ford" with 25%).
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.
The negative outlook considers the challenging environment for profitability
in North America as build-rates at Lear's major customers
have declined and commodity costs have not been fully recovered or offset
through other efficiencies. The outlook also incorporates the downside
risks from North American consumer interest in light trucks, exposure
to developments in GM's and Ford's North American market shares,
as well as industry uncertainty arising the expiration of labor agreements
between the Big 3 North American OEMs and the UAW in the fourth quarter
of 2007. Should satisfactory accords not be reached prior to the
end of the contracts, any prolonged disruption to production could
adversely affect Lear's volumes and potentially stress other suppliers
with whom it may have some dependency. Lear has recently received
$200 million in a new equity investment from funds managed by Mr.
Carl Icahn which has enhanced its capital structure and liquidity profile.
Similarly, it is evaluating contributing substantially all of its
North American Interior business into venture being structured with an
entity controlled by Mr. Wilbur Ross. Should an agreement
be concluded, and depending upon its final structure and timing,
Lear's credit metrics may improve, as its North American Interior
segment has generated negative EBITDA over the last twelve months.
Senior unsecured notes maturing in 2013, B3 LGD4, 61%
Senior unsecured notes maturing in 2016, B3 LGD4, 61%
Corporate Family, B2
Probability of Default, B2
First Lien Term Loan, B2 LGD4, 50%
$400 million 5.75% Senior Unsecured notes,
B3 LGD4, 61%
Euro 250 million 8.125% notes, B3 LGD 4, 61%
$800 million 8.11% notes, B3 LGD4, 61%
$515 million zero-coupon convertible notes, B3 LGD4,
Senior unsecured shelf, (P)B3 LGD4, 61%
Subordinated shelf, (P)Caa1 LGD6, 97%
Preferred shelf, (P)Caa1 LGD6, 97%
Speculative Grade Liquidity rating, SGL2
The last rating action was on November 7, 2006 when Lear's liquidity
rating was renewed at SGL-2. Should the entire amount of
Lear's 2008 notes be redeemed, ratings on those notes will be withdrawn.
The B3 LGD4, 61% rating assigned to the new notes recognizes
their junior position relative to the company's senior secured bank debt,
which consists of a $1.7 billion revolving credit,
which is not rated, and a $1.0 billion term loan.
Collateral supporting the bank debt consists of shareholdings in certain
material domestic and international subsidiaries and certain other assets.
However, negative pledge clauses under Lear's indentures limit the
extent of assets which can pledged to lenders without equally and ratably
securing the notes. Currently, the more restrictive of those
clauses are in the indentures covering the 2008 and 2009 notes.
They specify a basket of 5% of defined consolidated assets (as
well as certain other carve-outs). The recovery rates on
both secured and unsecured obligations reflect the benefits and limitations
of those restrictions.
Indentures for the new notes are proposed to have a different lien basket
than those in Lear's earlier notes. Lear's notes due in 2014
(principal amount of $400 million) have a general lien basket of
10% of defined consolidated assets. The new 2013 and 2016
notes will also have a 10% basket but will exclude liens securing
the company's senior bank credit facilities up to $3 billion
less amounts of the 2014 notes which might be given equal and ratable
treatment. However, while amounts remain outstanding under
the indenture covering the 2008 and 2009 notes, those note holders
continue to benefit from their more restrictive provisions. This
could permit a future situation in which the bank credit facilities could
expand their collateral (potentially with equal and ratable treatment
to the 2014 note holders) without providing equal and ratable treatment
to the 2013 and 2016 note holders. The indentures for the 2013
and 2016 notes will have a more specific change in control provision than
earlier issues. However, should control be deemed to have
passed to funds managed by or affiliated with Mr. Icahn,
no defined change in control event will have occurred.
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 billion
in 2005 and has more than 110,000 employees in 34 countries.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service