Federal-Mogul `BBB-` Affirmed by Fitch IBCA
4 August 1999
Federal-Mogul `BBB-` Affirmed by Fitch IBCA
NEW YORK--Aug. 3, 1999--Federal-Mogul Corp.'s senior unsecured debt issues are affirmed at `BBB-` by Fitch IBCA.The rating reflects the company's solid business position, well-balanced operations, strong free cash generation, and management's commitment and ability to maintain an investment grade credit profile. These strengths are tempered by the tough competitive environment in which the company operates, limited pricing flexibility, and the emergence of even more powerful competitors as the automotive components industry continues to consolidate.
Federal-Mogul strengthened its core product groups with three major acquisitions in 1998, almost quadrupling its sales. Operations are now clearly focused on powertrain, sealing systems and braking systems. Additionally, the portfolio is well balanced and diversified across customers, original equipment (OE) versus aftermarket exposure, and geographic markets. Margins are expanding with a richer product mix and cost takeouts. Over the next few years, the company's growth potential is based on new systems and modules flowing from its strong technical capabilities, expanding its global footprint as its customers globalize their own operations, and penetrating aftermarket channels using its existing capital base.
Federal Mogul demonstrates strong cash generation, and Fitch IBCA expects this to continue, underpinned by globalization and margin expansion. With these cash flows outpacing capex and other financial commitments, the company has substantial financial flexibility to use surplus cash for intelligent acquisitions or to reduce leverage.
Federal-Mogul continues to operate in a tough competitive environment, characterized by escalating customer pressures and limited pricing flexibility. These OE customer demands for systems capability and technical excellence are driving supplier industry consolidation. Federal-Mogul is a consolidator in a consolidating industry, and so far has been successful in realizing forecast acquisition synergies. The company's financial disciplines have also led it to decline bidding contests for acquisitions that did not meet its financial targets.
Even though Federal-Mogul used a large equity component in its acquisition financing, credit protection measures remain temporarily stretched until synergies and growth flow through. In 1998, the company issued $2.27 billion of net new debt and $1.38 billion of new equity. For the 12 months ended June 30, 1999, which did not include the full-year contributions of acquisitions, EBITDA interest coverage was 3.85 times (x) and total debt/EBITDA was 3.37x. Fitch IBCA estimates that 1998 pro forma leverage and coverage were 3.11x and 3.79x, respectively, consistent with parameters for the current rating.
Management has demonstrated its ability to restore financial flexibility rapidly, and remains committed to following this financing model in the future in order to maintain credit protection measurements consistent with an investment grade rating. Fitch IBCA expects that debt/EBITDA will remain at or under 3x, and that management will approach its 45% debt/capital target even as it contemplates further acquisitions.
The company took on asbestos claims exposure with T&N Ltd., but Fitch IBCA considers these claims to be manageable relative to cash generation, and the total exposure is capped by insurance coverage.
Federal-Mogul, 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.