Lear Corp.'s Recovery Rating Profile

Transcription

1 Recovery Report: Lear Corp.'s Recovery Rating Profile Primary Credit Analyst: Lawrence Orlowski, CFA, New York (1) ; Recovery Analyst: Greg Maddock, New York (1) ; Table Of Contents Overview Legal And Structural Considerations Issuer Credit Rating Rationale Recovery Analysis JANUARY 23,

2 Recovery Report: Lear Corp.'s Recovery Rating Profile Overview Standard & Poor's Ratings Services assigned its issue and recovery ratings to Southfield, Mich.-based automotive supplier Lear Corp.'s increased and extended $1 billion senior secured revolving credit facility and to the company's new $500 million senior unsecured notes due We also revised our recovery ratings on the company's existing senior unsecured notes due 2018 and 2020 in view our expectation of increased senior secured debt outstanding at simulated default in 2017, resulting from renewed weakness in the worldwide automotive market and from several small acquisitions that do not add value. If Lear were to default, its business model would remain viable because of the company's extensive presence in the automotive seating market and its developing position in the electrical power management business. Table 1 Lear Corp.--Credit Profile Corporate credit rating Estimated gross enterprise value at default (USD Millions) BB+/Stable/ Simulated year of default 2017 Facility/issue Estimated principal at default (USD Millions) Issue rating Recovery rating Expected recovery (%) Maturity Debt at obligors on primary debt $1.0 bil. revolver 1,000 BBB % sr. notes due BB % sr. notes due BB New sr. notes due BB Debt at non-obligors 180 mil. factoring line 0 N.R. N/A N/A Annual $8 mil. local line 8 N.R. N/A N/A Annual N.R. Not rated. N/A Not applicable. Legal And Structural Considerations Lear finances its worldwide operations primarily in the U.S., advancing funds to foreign operations (approximately 60% of earnings) through intercompany loans. Senior secured lenders benefit from the pledge of 65% of foreign subsidiaries' stock and a lien on all of the borrower's and domestic subsidiaries' assets. Capital structure Lear financed its November 2009 emergence from bankruptcy with a $375 million first-lien term loan and a $550 million second-lien term loan. In March 2010 Lear added a $110 million senior secured revolving facility. Subsequently, the company issued $350 million of 7.875% eight-year senior unsecured notes and $350 million of JANUARY 23,

3 Recovery Report: Lear Corp.'s Recovery Rating Profile 8.125% 10-year senior unsecured notes, repaying the term loans, and replaced the $110 million senior secured revolver with a $500 million senior secured revolving credit facility. The company has since redeemed 10% of its notes and proposes to issue $500 million in new senior unsecured notes and expand and reset its revolving credit facility at $1 billion with a 2018 maturity. The revolver is available to Lear and specified foreign subsidiaries (no foreign subsidiaries are currently named). In addition to the revolving credit facility, Lear has foreign local lines of credit available for working capital purposes. Security and guarantee package The secured lenders benefit from a first lien on all assets of the borrowers and domestic subsidiaries, and from a 65% pledge of foreign subsidiaries' stock. Lear's domestic subsidiaries also guarantee the unsecured notes. The shares of foreign subsidiaries and minority investments that are not pledged would accrue to the benefit of unsecured noteholders as well as unsecured and undersecured claimholders. Documentation/covenants The revolving credit facility is subject to a total leverage covenant and an interest coverage covenant. The notes do not include any financial maintenance covenants, but they restrict debt incurrence and intercompany transactions. These restrictions will cease to be effective if the notes are rated investment-grade by two rating agencies. Jurisdictional/insolvency regime issues The majority of Lear's operations occur outside the U.S., but most of its financing is U.S.-based. We assume, for the purposes of our simulated default scenario, that Lear would file for bankruptcy only in the U.S. and that the international operations would continue to operate outside of bankruptcy. This was, in fact, the case in Lear's 2009 bankruptcy filing. JANUARY 23,

4 Recovery Report: Lear Corp.'s Recovery Rating Profile Issuer Credit Rating Rationale See Standard & Poor's analysis on Lear Corp. published Jan. 14, 2013, on RatingsDirect. Recovery Analysis Table 2 Lear Corp.--Stressed Valuation (USD Millions) Simulated Default Assumptions Simplified Waterfall Simulated year of default 2017 Gross enterprise value 1,350 Adminstrative expenses 68 EBITDA decline at default 70% Net enterprise value available to creditors 1,283 EBITDA at default Secured first-lien debt 1,034 LIBOR/margin rise 4.0% Recovery expectations 90% to 100% Note: All debt amounts include six months of prepetition interest. Simulated default scenario Total unpledged enterprise value 344 Senior unsecured debt 1,187 Other pari passu unsecured claims 151 Recovery expectations 10% to 30% In our simulated default scenario, we assume a payment default in 2017 following a slump in the U.S. auto industry and continued lower auto production in Europe. We also envisioned that auto demand in Asia would decline, as the deflation of the current economic bubble affects consumers there. The general softness in auto markets globally would result in continued pressure on production and margins. Also, Lear would gradually deplete its cash balances and draw under its revolver prior to the downturn through a serious of add-on acquisitions that make only minor contributions to EBITDA. Other assumptions in our default scenario included: EBITDA in 2017 (the simulated default year) is $300 million; LIBOR at default of 250 basis points and credit deterioration (covenant relief) through default increase the credit margin an additional 200 basis points; Lear exercises it 10% redemption option for the 2018 and 2020 notes again in 2013; Unsecured claims, representing environmental claims, lease rejections, and rejection of 50% of current other postretirement employee benefits (OPEB) liabilities, total $139 million; and The revolving credit facility is fully drawn, refunding factoring lines and other uncommitted sources of working capital. Valuation We believe that if Lear were to default a second time, its business model would remain viable because of the company's extensive presence in the automotive seating market and its developing position in the electrical power management business. As a result, lenders would achieve the greatest recovery value through reorganization rather JANUARY 23,

5 Recovery Report: Lear Corp.'s Recovery Rating Profile than through liquidation, in our view. We used an enterprise value methodology to gauge recovery prospects and applied a 4.5x multiple to our estimate of EBITDA at default. The 4.5x multiple reflects the expected adjusted EBITDA margin (after capital expenditures) and is consistent with our analysis for this industry. Our valuation assumptions resulted in a gross emergence enterprise value of $1.35 billion available to Lear's lenders. Outcome We calculate net emergence enterprise value of $1.28 billion, after administrative costs of about $67 million. This would result in very high (90% to 100%) recovery for the senior secured lenders (including six months' prepetition interest) and afford the senior unsecured lenders modest (10%-30%) recovery (including six months' prepetition interest). JANUARY 23,

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