Fitch Downgrades Tenneco's IDR to 'B'; Remains on Watch Negative

NEW YORK--Fitch Ratings has downgraded the Issuer Default Rating (IDR) and outstanding debt ratings of Tenneco, Inc. (TEN) as follows:

-- IDR downgraded to 'B' from 'B+';

-- Senior secured bank credit facility to 'BB-/RR2' from 'BB+/RR1';

-- Senior secured notes to 'CCC/RR6' from 'BB/RR2';

-- Senior unsecured notes to 'CCC/RR6' from 'B-/RR6';

-- Subordinated notes to 'CCC/RR6' from 'CCC+/RR6'.

The ratings remain on Rating Watch Negative as discussed in the Dec. 11, 2008 Fitch release titled 'Fitch Places Seven U.S. Auto Suppliers on Rating Watch Negative.' As discussed therein, the Negative Watch is based on the uncertain longer-term federal assistance for the U.S. OEMs (original equipment manufacturers) and the impact of a potential bankruptcy filing by General Motors (GM). In the event of a GM bankruptcy, Fitch's prospective IDR for Tenneco could be downgraded one notch to 'B-'. Approximately $1.5 billion of outstanding debt is covered by these ratings.

The downgrades reflect the severe automotive production declines in the fourth quarter of 2008 (4Q08) and beginning of 2009, and Fitch's expectations for an extended decline in global auto volumes, which will continue to pressure Tenneco's credit quality and operating performance. Deep production cuts by domestic and international manufacturers in Tenneco's major product platforms are expected to more than offset any potential growth in Tenneco's global customer base and products through at least the next several quarters. In the near term, diminished product demand will cause a significant drop in EBITDA during a period of increased use of working capital. The weakened credit profile is likely to persist until year-end and recovery in the balance sheet will take some time.

Liquidity has decreased over the past year, but Fitch considers it to be adequate for the new rating levels. At year-end 2008, cash on hand was $126 million and availability on the revolving credit facility was $394 million. Important to note, Tenneco does not have any significant debt maturities until 2012. The company has a modestly underfunded pension plan, which, due to losses in the equity and fixed income markets in 2008, is likely to require incremental contributions over the near term.

Tenneco recently amended its credit facility to provide it with additional cushion during the industry downturn; the facility expires in 2012. The size and tenor of the facility remain the same, but there is a significant change in covenant ratios. Most significantly, the net leverage covenant increases to 7.35 times (x) and 7.90x during 2Q09 and 3Q09, respectively, illustrating the significant impact the industry environment will likely have on Tenneco's financial results. After those quarters the leverage requirement steps down, indicating that Tenneco's balance sheet strain should be for a limited period. Fitch expects that the change in leverage from the original 3.75x in those quarters will provide Tenneco with needed flexibility during a time when debt levels will increase.

Fitch expects that Tenneco's free cash flow could be negative in 2009, but that there are several factors that will limit the magnitude of cash drains. Tenneco remains dedicated to cost-cutting initiatives and cash preservation, and efforts made by the company to reduce headcount and expenses should be realized in 2009. The decline in commodity prices should also be a positive for margin performance in 2009 as escalating material prices have hampered supplier margins over the past several years. Tenneco's capital expenditures increased significantly in 2008 in order to finance the company's expansion, particularly overseas, but in 2009 capital expenditures should decrease significantly, enabling the company to conserve cash flow.

The Recovery Ratings (RRs) reflect Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. The RRs were lowered to reflect the deteriorating automotive environment, which lead Fitch to estimate a lower distressed enterprise value under a going concern assumption. RRs on the senior secured facilities (revolving credit facility, Term Loan A, and Tranche B1) were lowered by one notch to 'RR2' which implies a recovery in the range of 71%-90%. The second lien notes were downgraded four notches from 'RR2' to 'RR6', which reflects a recovery in the range of 0%-10%. The 'RR6' ratings for the senior unsecured notes and subordinated notes are unchanged.

Short-term results for the automotive and commercial truck industries are expected to be weak given the extended shutdowns among U.S. manufacturers and the decline in global production expected in 2009. Financial support from the government to the auto suppliers is possible in the near term; however, it is not part of Fitch's assumptions. Aid to the auto suppliers would be viewed as a favorable action.

Over the longer term, Tenneco's expanding position in the growing emissions segment positions the company well to expand its customer base and volumes. Product demand should increase given plans for tighter emission standards. Tenneco's migration to more technological, value-added products should also support margins. Historically, Tenneco had a track record of efficient working capital management and manufacturing cost improvements. These efforts should help offset expected cyclical volume declines.

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