* NOVEMBER 8, 2009, 12:31 P.M. ET
Lear to Exit Bankruptcy Court
By JOHN D. STOLL
Lear Corp. plans to emerge from bankruptcy protection Monday with a
message from Chief Executive Bob Rossiter: "We are a tighter,
leaner company that will never make some of the mistakes we made in
The Southfield, Mich., company, which produces seats and
electronics for automobiles, expects to emerge from bankruptcy
court on Monday, just four months after it filed for protection
under Chapter 11 of the U.S. Bankruptcy Code. Despite concerns
voiced earlier in the year suggesting there would be no bankruptcy
financing available for auto suppliers, Mr. Rossiter managed to
line up creditors and lenders willing to fund a $500 million
debtor-in-possession facility and exchange billions in debt for new
Lear and many of the other key players in the U.S. supply industry
avoided the dire prospects predicted for the auto-supply chain
earlier this year. At least 50 auto suppliers have filed for
bankruptcy protection in 2009, but many of them have managed to
quickly regain footing and avoid liquidation even though the U.S.
auto-supply chain is operating at about 46% of its actual
production capacity, according to the Original Equipment Suppliers
"There has been significant progress in recent months to recognize
and protect the [suppliers] that will continue to provide the
foundation beneath any [auto maker] looking forward to surviving
this crisis," CSM world-wide supply-chain analyst John Eaton said
in a recent research report. Billions in aid from the U.S. Treasury
Department, and an unexpected, albeit limited, source of DIP
financing has helped salvage many of the larger parts makers.
On Monday, Lear is expected to post a $100 million operating profit
and $100 million in positive free cash flow for the third quarter,
as well as announce that its new business backlog for the next
three years has swelled to $1.4 billion, or 25% higher than it was
in January, according to a spokesman.
For Mr. Rossiter, who has been at Lear's helm since 2003, the
challenge has never been about proving that his company has a
strong core. His challenge has been posting sustained earnings
growth while relying heavily on U.S. auto makers that often oblige
suppliers to take price reductions, shoulder material cost
increases, and incur mountains of debt in order to win supply
It was a pile of debt, much of which was related to a business it
hasn't owned since mid-decade, that landed Lear in bankruptcy
The auto supplier divested its interiors business—which relied on
the extremely low-margin production of injection-molded plastic
parts—to billionaire investor Wilbur Ross.
As a part of that deal, Lear agreed to keep about $2 billion of
that business's debt. "We were carrying this $2 billion in debt
that we had no sales on," Mr. Rossiter said in an interview
By last November, after the meltdown of the credit markets and a
nosedive in U.S. auto sales, Mr. Rossiter said it was clear that
the company would have to do something about its debt load.
Rather than wait for government funding or request significant
bailouts from its customers, Mr. Rossiter tried his luck with
bankruptcy and creditors, making it clear that "we are more
realistic about our approach...we want a fair return for what we
Lear expects its stock to resume trading on the New York Stock
Exchange upon the company's emergence from bankruptcy court. Mr.
Rossiter said the equity, which is mostly owned by the creditors
who backed the Chapter 11 filing, is expected to be valued at $1.9
billion, a level not seen since mid-2008. "We think we fixed the
business and we're going to come out with investment-grade
metrics," Mr. Rossiter said.
Under Mr. Rossiter, Lear increasingly has moved operations to
lower-cost markets and won business in markets outside the U.S.,
including Asia and Europe. Its most recent achievement was scoring
the seating business for the Fiat 500 compact car that Fiat SpA
plans to make in Mexico and sell in the U.S.
But despite deep retooling, Lear has made one annual profit in the
past four fiscal years. Standard & Poor's Ratings Services, in
a news release issued late Friday about its expectations for Lear's
credit ratings, estimated that 37% of Lear's 2008 sales are based
on deliveries to General Motors Co. and Ford Motor Co. A quarter of
its seat sales are to GM. S&P expects to assign a "B" credit
rating to Lear's corporate credit and view it with a "stable
Analysts expect Lear's court-protected debt restructuring, which
will lower interest payments, to help drive profits. Lear also
reworked supply and labor contracts in bankruptcy court in order to
cut costs and fortify pricing. "Based on the capital structure
under the plan of reorganization, the new company will have reduced
its debt by more than 75% from pre-bankruptcy levels," S&P
credit analyst Lawrence Orlowski wrote in the release.
"We assume Lear's global sales for 2010 will grow 12%," Mr.
Orlowski added. Still, the supplier is likely to face major
challenges. "We believe the new Lear's business risk profile after
emergence will be weak, largely because of volatile auto production
levels, high fixed costs, fierce competition, and severe pricing
pressures that characterize the global auto supplier industry," Mr.
Write to John D. Stoll at email@example.com