Fitch Initiates Coverage of Visteon; Sr Unsec 'BBB-', CP 'F3'

    CHICAGO--June 11, 2003--Fitch Ratings has initiated ratings on the Visteon Corporation (Visteon) and assigned ratings of 'BBB-' to the company's senior unsecured debt and unsecured bank facility and a rating of 'F3' to the company's commercial paper. The Rating Outlook is Stable.
    Fitch's ratings for Visteon are based on the company's industry position, its strong balance sheet, its trend of growing its non-Ford Motor Company (Ford) business, and its proactive restructuring activities. Negative factors include weak profitability, a negative industry backdrop, Visteon's current leverage to Ford (approximately 78% of sales), the terms of its separation from Ford, looming other post-retirement benefit payments, and risks associated with the Fall 2003 UAW contract negotiation.
    Visteon could be negatively affected by the projected 2003 light vehicle build environment (Fitch estimates a 5-7% decline in US industry build rates and a 3-5% decrease in European build rates). Visteon, however, has sufficient liquidity to both weather weaker markets and to enable it to adjust its product mix and cost structure in order to achieve a sufficient level of profitability. Much of this will depend on Ford, as Visteon's business is highly leveraged to Ford. With approximately 78% of current business being supplied to Ford, Visteon is at risk should Ford fail to regain its competitive position. Although it is working to move this percentage to 70% over the next several years, Visteon has yet to demonstrate the capacity to further reduce this exposure to a more reasonable 50% or less. As such, Visteon's success will continued to be tied to that of Ford for the foreseeable future.
    Visteon enjoys a competitive industry position with operations that can be grouped into three major categories. The first and most competitive business set are those considered world-class in their capabilities. In order to reduce their dependence on Ford, these are the areas where Visteon will have to grow its business and maintain/expand its margins. This set of businesses would include businesses such as cockpits, climate control, fuel storage/delivery, lighting, audio, and multimedia. Fitch estimates that approximately one half of Visteon's business fits this category. The next set of businesses are those that would be maintained but probably not expanded. Significant portions of businesses in areas such as chassis, exteriors, and powertrain components would probably fit in this category. These businesses should continue to perform adequately although individual product lines may face stronger margin pressure. Fitch estimates that approximately 20% of fiscal year 2002 sales would fit in this category. In many cases this business possesses significant barriers to other potential suppliers, as much of this business is leveraged to Ford and Ford has reasons other than just price to give Visteon the business (such as concerns over utilization of the leased workforce). As a result, the biggest risk to these businesses would be the failure to maintain margins, especially as Ford continues to restructure. The final set of businesses are businesses that need to be either re-evaluated or which will not receive substantial new investment. The reasons for this lack of investment vary, but in most cases Visteon will have to evaluate the business to see if it wishes to remain a supplier of these parts. Should Visteon decide to cease production of these parts, then it would have to either sell or close these businesses. An example is the seating division, which is currently being divested. Fitch estimates that as much as 15% of Visteon's businesses will face minimal re-investment and 15% may need to be restructured, divested, or sold.
    Since its divestiture from Ford, Visteon has undergone a significant period of restructuring. Although changes have and continue to take place (i.e. the seating transaction), Fitch believes that further restructuring actions may be necessary. Much of this is complicated, by the agreement with Ford. Unlike the Delphi Corporation (Delphi) which was cleanly divested from GM, Visteon still has strong contractual attachments to Ford. These ties include, but are not limited to, the fact that most of Visteon's U.S. hourly workforce are leased from Ford. These employees are paid by Ford, but Visteon reimburses Ford for their cost. This, when combined with the current United Automobile Workers (UAW) contract, makes it difficult for Visteon to not only manage the cost of its union labor (as Ford is responsible for negotiations) but also makes workforce reductions more difficult. The UAW contract also requires consent for plant closings and this fact, when combined with the fact that any issues related to the leased work force must be negotiated with Ford, makes each restructuring action a time consuming and potentially costly proposition.
    Despite these restructuring efforts and its continuing issues with Ford, Visteon retains credit metrics consistent with an investment grade rating. With outstanding debt of $1.64 billion, Visteon has a debt-to-capital ratio of 36%. When combined with strong interest coverage metrics (8.8x EBITDA/interest incurred and 5.0x EBITDAR/interest incurred plus rents), Visteon maintains an investment grade balance sheet. In addition, Visteon maintains good liquidity with $947 million of cash/marketable securities on hand (March 31, 2003) and $1.8 billion of available credit facilities ($1.55 billion of which is used to backup existing worldwide commercial paper facilities and $250 million of which is projected to be used for Visteon's new consolidated headquarters). The bank facilities come due for renewal in June 2003 ($775 million revolver, 364 day term) and June 2007 ($775 million revolver, 5 year term). In addition to these facilities, Fitch estimates that Visteon has at least $750 million of investment grade receivables available for factoring. Clearly balance sheet strength is Visteon's strongest positive rating factor.
    Visteon also faces substantial pension and other post-retirement benefit (OPEB) issues. In this regard, Visteon is not alone, as many U.S. industrial companies face these issues. Where Visteon is unique, however, is in its arrangements with Ford on these issues. In the area of U.S. pensions, Visteon's arrangement with Ford is that Ford is responsible (i.e balance sheet obligation and actual cash payment of pensions) for most of Visteon's employees at the time of separation. This includes essentially all retirees, hourly employees (to include those employees currently being leased to Visteon), and retirement eligible (at the time of separation) salaried workers. In return, Visteon is required to pay Ford annually a figure that approximates the Statement of Financial Accounting Standards (SFAS 87) cost of hourly employees that Visteon retained post separation. Visteon also retains the future obligations associated with all new hires since the separation. This arrangement benefits Visteon in that it does not face much of the current volatility surrounding mandatory payments. In theory this contract with Ford understates Visteon's obligations (recognizing that the magnitude of pension obligations is potentially volatile based factors such as market returns and interest rates). One factor to note is that Visteon does not have complete control of some its plans in that it can not seek a plan termination for employees that are actually contractually Ford employees. This is not that significant an issue as clearly no UAW covered automaker or supplier is going to terminate their plans without facing substantial resistance from the union. Finally, like the Big Three automakers and Delphi, Visteon will have to accept the pension changes negotiated by the lead company.
    In the area of OPEB, the situation is somewhat different. Visteon retains the balance sheet OPEB obligation for both new hires and for employees who were active at the time of separation. In the case of the Visteon-assigned Ford employees, however, Ford retains the ultimate financial responsibility. In order to offset this responsibility, the terms of the separation agreement require Visteon to pre-fund its OPEB costs for these employees. Although currently only paying actual costs (and accruing costs in accordance with SFAS 106), Visteon will be required to pre-fund these covered hourly personnel beginning in 2006 and the equivalent salaried plan beginning in 2011. The first annual payment is currently estimated to be $465 million, with the amount due decreasing over time on a fifteen year contractual amortization schedule. This agreement essentially crystallizes Visteon's OPEB obligations into a debt-like obligation. In addition to this, unlike many other companies, Visteon does not retain the right to modify/terminate the plans of a portion (i.e. the leased employees) of its workforce, as that right remains with Ford.
    As mentioned earlier, the upcoming UAW contract is also a concern. Given that approximately 35% of Visteon's hourly workforce (and slightly under 25% of the total workforce) belongs to the UAW, the upcoming negotiations are important to Visteon's future. Under the existing separation agreement, Visteon will be forced to take Ford's 2003 pattern agreement. Although this somewhat limits Visteon's flexibility, the Big-Three will likely seek an agreement that addresses issues important to Visteon as well. These include, but are not limited to, healthcare costs, pension costs, post-retirement benefits, wage rates, plant closure provisions, and overall work rules.