Fitch Downgr Federal Mogul's Sr Debt To `B-'; Bk Debt Rtd `B+'

    NEW YORK--Jan. 30, 2001--Fitch downgrades the rating on Federal Mogul Corp.'s (FMO) senior unsecured debt from `BB-' to `B-', and rates its secured bank debt `B+', while maintaining it's Negative Rating Outlook. The downgrade reflects a number of factors, including substantially weakened operating performance, the effective subordination of the unsecured debt to the recently secured bank debt, and ongoing asbestos liability concerns.
    FMO's operating performance has been impaired due to several factors, including the effects of a weak North American aftermarket and sharply declining heavy-duty truck and automotive markets. Also, FMO has delivered less in synergies from recent acquisitions than originally targeted and previously planned divestitures have been postponed due to poor market conditions.
    Further weakening the position of bondholders was the recent amendment to FMO's bank facilities. In December 2000, FMO was successful in renegotiating its existing bank credit agreement under which the company was likely to violate a leverage covenant at year-end. FMO also expanded its bank lines by $550 million, securing a $200 million revolving credit facility and a $150 million term loan from domestic lenders and a $200 million line from a foreign bank group. The covenant relief and additional lines that FMO obtained provide much needed liquidity and increased financial flexibility. Collateral was added to both the incremental and existing bank facilities. The incremental domestic facilities received a first priority security interest in FMO's U.S. assets, including property plant and equipment (PP&E), inventories, and unencumbered accounts receivable. The existing facilities were granted a second lien on those assets. The incremental foreign facilities received a first priority security interest in FMO's European receivables. The rating differential on the bank debt reflects the value of the collateral package and the substantial amount of junior capital beneath the bank debt.
    In January 2001, FMO released summary findings of the asbestos study they contracted through National Econometric Research Associates (NERA). The results of the NERA study largely confirmed asbestos cash payments most recently projected, estimated at $350, $250, and $150 million in 2001, 2002, and 2003, respectively. FMO has also outlined changes in its asbestos strategy, which include exiting the `naming' formula of the Center for Claims Resolution (CCR) and utilizing the CCR as more of an administrative body. In particular, FMO will continue to concentrate on quickly resolving malignant claims while more aggressively investigating and defending non-malignant/non-impaired claims. FMO believes that more prudent management of the latter is the key to controlling its future liabilities. While FMO's shift in strategy appears positive, the environment for asbestos litigation remains very uncertain and even at projected levels the cash payments in the next several years represent a large consumption of FMO's cash flow.
    Importantly, FMO continues to win new business awards and its operations are supported by strong product franchises in both the OE and aftermarkets. FMO recently announced the appointment of a permanent new CEO and COO, both of whom bring extensive automotive experience to the company.
    Fitch estimates that FMO's leverage at Dec. 31, 2000 was above 5 times (x), including its subordinated debt. With operating performance and cash flow weakened and asbestos payments remaining substantial for the next several years, Fitch does not anticipate improvement in debt levels in the intermediate term. Although FMO has outlines several strategic initiatives to boost operating earnings, these actions will require significant cash outlays in the short- term and benefits of these programs will not be immediate. The Negative Rating Outlook remains due to concerns about the difficult market conditions FMO will face in 2001, and the uncertain environment and challenges surrounding its asbestos liabilities.
    Federal-Mogul Corp., headquartered in Southfield, MI, is a global producer and distributor of a broad range of components for automobiles and light trucks, heavy-duty trucks, farm and construction vehicles and industrial products. The company's major products and systems focus on engines, sealing and braking, which it sells to OE producers as well as to replacement markets.