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December 4, 2007 |
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FEDERAL-MOGUL: Expected Chap. 11 Exit Cues Moody's (P)Ba3 Rating Moody's Investors Service has assigned prospective ratings to the reorganized Federal-Mogul Corporation -- Corporate Family, (P)Ba3. In a related action Moody's assigned a (P)Ba2 rating to new senior secured credit facilities. The outlook is stable. The (P)Ba3 Corporate Family Rating is based on the company's expected emergence from Chapter 11 with its asbestos liabilities eliminated and moderately reduced debt levels that should be readily serviced with the company's strong business in the auto parts sector. The ratings also reflect the continued performance of Federal- Mogul's businesses throughout the bankruptcy process, largely supported by new program launches and profit improvement programs. The company's diverse business segments, as well as geographic and customer diversity, have also mitigated the effect of Big-3 production declines experienced in North America. A key consideration in Federal-Mogul's filing for Chapter 11 in the US and commencement of restructuring proceedings in the United Kingdom was the company's exposure to asbestos liabilities; these liabilities have been addressed through the bankruptcy process and the company will emerge from bankruptcy with a Federal court injunction that prevents the assertion of current and future asbestos claims against the company, and instead directs those claims to an asbestos trust. The company has used the Chapter 11 and UK Administration process primarily to eliminate its asbestos liability exposure, and to lower pension obligations. Unlike other auto parts supplier bankruptcies, Federal Mogul has not used the process primarily to renegotiate major customer or supplier contracts nor exit major leases. However, Federal-Mogul has implemented ongoing restructurings, facility consolidations, and quality improvement programs. These efforts have allowed the company to maintain its customer base, generate new business awards, move production to low cost countries, and improve profitability. The stable outlook reflects the benefits derived from the restructuring process combined with Federal-Mogul's leading product lines in diverse business segments which are expected to further improve the company's credit metrics in 2008. Federal- Mogul has a diverse customer base with no customer amounting to more than 7% of revenues. Federal-Mogul's operating profit margins are about 7% and are expected to improve over the intermediate term, which would be viewed favorably under Moody's Auto Supplier Rating Methodology. Based on its improving margins, the company is also expected to be free cash flow generative in 2008, which should provide opportunity for debt reduction. However, marginal revenue growth in 2008, largely driven by the aftermarket business, combined with moderate leverage, constrain the company's ratings. The company's exit financings will be completed in two steps. First, the rated senior secured term and revolving loans, a new unrated senior secured tranche A loan, and a new unrated junior secured PIK Note will be used to repay outstandings under the existing US$1.1 billion senior secured DIP facility, bankruptcy related fees and expenses, prepetition bank and surety debt and, if necessary, make a US$140 million loan to the U.S. asbestos personal injury trust. In the second step of the financing, which is expected to occur within 60 days, the remaining US$2,082 million of the rated senior secured delayed drawn term loans may be used to repay the unrated tranche A term loan, the unrated junior secured PIK notes, and provide excess cash. The unrated facilities are provided for under the company's plan of reorganization and include interest rate step ups and other interest rate adjustments. The company subsequently negotiated a potential take-out of the unrated facilities. Under the Plan of Reorganization for the company's emergence from Chapter 11, all of the asbestos liabilities of the U.S. and U.K. entities covered by the Plan will be assumed by an asbestos trust, and the entities covered by the Plan will be discharged from those liabilities as set forth in the Plan. The asbestos trust will receive 50.1% of the equity in reorganized Federal- Mogul, proceeds from Federal-Mogul's asbestos related insurance policies, certain additional rights enumerated in the Plan of Reorganization and, under certain circumstances, a US$140 million loan from reorganized Federal-Mogul. An entity affiliated with Carl Icahn will have the option to purchase the shares of the reorganized Federal-Mogul held by the asbestos trust within 60 days of Federal-Mogul's emergence for approximately US$775 million. Current and future U.S. asbestos claims that are asserted against the asbestos trust will be satisfied in accordance with the distribution procedures established by the Trust. In November 2006, a separate asbestos trust was established under company voluntary arrangements approved in the United Kingdom to resolve asbestos claims that have or will be brought in the United Kingdom against certain of Federal-Mogul's U.K affiliates. Restricted cash balances were moved in November 2006 to fund the U.K. asbestos trust and the remainder of the company voluntary arrangements. Federal Mogul is expected to have good liquidity over the next twelve months. The US$540 million asset-based revolver is expected to be unfunded upon emergence with sufficient collateral to support the committed amount of the facility. Pro forma for the two-step exit financing, Federal-Mogul will have approximately US$700 million of cash on hand. Post-emergence, the company is expected to generate positive free cash flow which should support 1% annual amortization under the term loans. After repayment of the unrated senior secured tranche A term loan, the senior secured exit credit facilities will not have financial maintenance covenants. The US$140 million loan, if made, may be repaid in cash within 60 days of emergence under certain conditions of the asbestos trust. However, Moody's assumes the loan will be repaid with reorganized Federal-Mogul stock, a condition provided under the Plan of Reorganization. Reorganized Federal-Mogul will have limited alternate liquidity, as the senior secured credit facilities are secured by essentially all of the company's domestic subsidiaries' personal property (including 66% of the stock of certain first-tier foreign subsidiaries) and certain real property. For the year ended 12/31/07, pro forma for the post emergence capital structure, EBIT/interest would approximate 1.9x and debt/EBITDA would approximate 4.2x (3.4x, net of cash). These ratings were assigned: -- (P)Ba3 Corporate Family rating; -- (P)Ba3 Probability of Default rating; -- (P)Ba2 (LGD3, 42%) rating for the US$540 million senior secured asset based revolver; -- (P)Ba2 (LGD3, 42%) rating for the US$1 billion senior secured delayed term loan facility; -- (P)Ba2 (LGD3, 42%) rating for the US$1.96 million senior secured term loan, which includes a US$50 million senior secured synthetic letter of credit facility and a US$1.91 billion senior secured delayed draw term loan; Speculative Grade Liquidity Rating, SGL-2 Future events that have potential to drive Federal-Mogul's outlook or ratings higher would result from operating performance leading to improvements in EBIT/Interest coverage to over 3.0x, or in leverage approaching 3.0x. Future events that have potential to drive Federal-Mogul's outlook or ratings lower include decreasing aftermarket volumes or profitability, production volume declines at the company's OEM customers, material increases in raw materials costs that cannot be passed on to customers or mitigated by restructuring efforts, or deteriorating liquidity. Consideration for a lower outlook or rating could arise if any combination of these factors were to increase leverage, or result in EBIT/Interest coverage below 1.8x times. Federal-Mogul Corporation, headquartered in Southfield, Michigan, is a leading global supplier of vehicular parts, components, modules and systems to customers in the automotive, small engine, heavy-duty, marine, railroad, aerospace and industrial markets. The company's primary operating segments are: Powertrain - Energy, Powertrain Sealing and Bearings, Vehicle Safety and Protection, Automotive Products, Global Afermarket. Federal-Mogul offers market-leading products for original equipment and aftermarket applications. Annual revenues approximate US$6.7 billion. Federal-Mogul has operations in Thailand. |
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