Moody's rates Hayes Lemmerz notes B1, loan Ba3

Moody's Investors Service assigned ratings for the proposed debt to be issued by HLI Operating Company, Inc. as part of Hayes Lemmerz bankruptcy reorganization. Moody's rated Hayes Lemmerz' proposed $225 million senior unsecured notes maturing 2013 at B1 and its proposed $125 million guaranteed senior secured bank revolving credit facility maturing 2008 and $450 million guaranteed senior secured term loan maturing 2009 at Ba3. The outlook is stable.

The rating assignments reflect that while Hayes Lemmerz has already taken major steps to improve its overall cost structure and fully integrate previous acquisitions, additional productivity improvement and capacity rationalization efforts are still necessary, Moody's said.

In order to continue winning profitable new business, improve the company's return on assets, and maintain leading market shares, Hayes Lemmerz must also continue to invest heavily in research, development, and engineering, as well as in capital expenditures.

The company operates within competitive global markets that remain highly dependent upon automotive industry trends and strong consumer confidence levels. Estimates for North American production levels during 2003 and 2004 remain quite uncertain.

Hayes Lemmerz' customer base remains very concentrated with the Big 3, which accounted for 55% of global revenues during 2002. The company continues to face significant OEM price compression, particularly with regard to its more commodity-oriented and more easily substituted product lines within the steel wheels, commercial highway, and aftermarket business units.

Positive influences on the ratings are the substantial de-leveraging of Hayes Lemmerz through the rationalization of its balance sheet via the conversion of substantially all of the company's general unsecured claims and a certain amount of secured claims into common stock. In addition, the company's new senior management team has already closed three major plants, and right-sized the commercial highway and aftermarket businesses. Management continues to rationalize capacity, reduce overhead and materials costs, and implement more effective internal controls, Moody's noted.

Jan. 31, 2003 fiscal year end pro forma total debt/EBITDA leverage assuming Hayes Lemmerz' proposed new capital structure was about 3.0x, both before and after adjusting for the present value of off-balance sheet leases and $10 million of preferred stock to be issued in conjunction with the reorganization of the capital structure, Moody's said. The company's pro forma EBIT interest coverage for the period was satisfactory about 2.5x, while its pro forma EBIT return on total assets was weak at about 5.1%.

S&P rates Hayes Lemmerz loan BB-, notes B+

Standard & Poor's assigned a BB- rating to the new $575 million senior secured bank credit facility of HLI Operating Co., an indirect subsidiary of Hayes Lemmerz International Inc. and a B+ rating to HLI's proposed $225 million senior notes due 2013. The outlook is stable.

The new financings will support Hayes' pending emergence from Chapter 11 bankruptcy.

S&P said the ratings reflect Hayes' below-average business profile as the world's largest supplier of wheels to the highly competitive and cyclical automotive industry.

The challenges of the automotive industry more than offset Hayes' market leading positions in North America and Europe and fair business diversity. The ratings also incorporate the company's weak financial profile, characterized by a heavy debt load and thin cash flow protection.

The challenges of the automotive supply industry have intensified in recent years, S&P noted. Suppliers have suffered from demand fluctuations; intense pricing pressures; rising raw material, insurance, and employee benefit costs; and ongoing competitive pressures. Little relief from the challenging environment is expected in the next few years.

Hayes' 2001 bankruptcy filing was primarily caused by its heavy debt load from several acquisitions, very weak operating performance of certain manufacturing plants, reduced cash flow stemming from a decline in demand, and uncertainty surrounding the restatement of financial statements because of accounting irregularities. The bankruptcy filing contributed to revenue and market-share declines.

Since filing for bankruptcy, however, Hayes has closed unprofitable plants, reduced headcount, and worked to restore damaged customer relationships. These actions, combined with stronger industry demand, led to improved financial results during fiscal 2003, ended Jan. 31, with EBITDA increasing 48%, to $228 million.

Hayes will have a highly leveraged capital structure, with total debt to EBITDA of about 3x, S&P said. Profitability has improved but is expected to remain modest during the next few years. Ongoing cost-saving actions, new business wins, and growth in aluminum components penetration should result in stronger margins over time.

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