(The following statement was released by the ratings agency)
MOODY'S LOWERS THE DEBT RATINGS OF VISTEON CORPORATION (SENIOR UNSECURED TO Ba1; SHORT-TERM RATING TO NOT PRIME)
Approximately $2.1 Billion of Debt Securities Affected.
NEW YORK, Dec 23 -- Moody's Investors Service has lowered the long and short term debt ratings of Visteon Corporation (Visteon) to Ba1 and Not Prime from Baa3 and Prime-3, respectively. At the same time a Ba1 senior implied rating was assigned. The rating outlook is stable. The rating actions reflect Visteon's continuing challenges to operate profitably and to earn adequate returns commensurate with its former rating levels. Although Moody's believes that the newly announced Visteon/Ford Agreement (V/F Agreement) and asset impairment charges should improve Visteon's competitiveness and enhance cash flow generation in a variety of ways, Visteon's profitability and returns will remain sub-par for the intermediate term. The stable outlook incorporates Moody's expectation that the company will make steady progress in winning new business, especially non-Ford business, continue to lower its cost base, become profitable, and generate positive free cash flow in 2004. The rating agency noted however, that Ford will remain Visteon's dominant customer for the foreseeable future. Ford has a number of challenges with respect to its own profit improvement, yet the continuing commercial arrangements with Visteon reflects Visteon's importance to Ford. During the next few years, Ford's terms and conditions of payment, cooperation in developing known price-down schedules and willingness to participate in investment requirements of Visteon is viewed favorably. Materially reduced OPEB funding obligations for Visteon and one-way flow of UAW workers back to Ford, coupled with the potential of new UAW hires with a more competitive compensation package also should impact Visteon's financial performance positively, yet Visteon's returns will still lag its peers. Should there be any delay in realizing profitable operations and generation of positive free cash flow, then adverse rating consequences could arise. The V/F Agreement provides structural and commercial benefits that should make Visteon more profitable. Structual benefits include: 1.) Visteon is no longer obligated to fund $1.7 billion of OPEB obligations, 2.) the funding of the remaining OPEB obligations, starting in 2006, will be stretched-out for an additional 29 years, substantially lowering the required cash payments by about $400 million starting in 2006, 3.) Visteon's investment in new IT systems, up to $200 million, will be shared equally between Visteon and Ford, and 4.) Visteon's exposure to funding UAW profit sharing that currently has a $50 million cap will continue to be capped, but at a lower amount ($2040 per UAW employee). Commercial elements of the V/F Agreement include: 1.) lump sum payment to Ford of $150 million, spread between the fourth quarter of 2003 and the first quarter of 2004, for North American price productivity and a schedule of price-downs annually for the next four years, 2.) Ford will accelerate payments for Visteon's products over the next three years, improving Visteon's cash flow, 3.) beginning with the 2007 model year, Visteon has the opportunity to receive labor differential relief (difference between UAW Master Agreement all-in wages and benefits less the new competitive wage package being negotiated with the UAW). Moody's noted that Visteon's financial performance has been hampered by its high cost structure, volatility of light vehicle production volumes in North America, and rising pension and OPEB costs to date. Moreover, the decline in Ford's market share and falling production volumes, along with price-down requirements on existing business, have further eroded profitability. Although the company has initiated a number of cost saving programs that should improve margins over time, the rating agency anticipates that the poor operating performance in 2003, and resulting weak credit metrics, will not improve meaningfully in 2004. Over the last twelve months ended September 30, 2003, Visteon's operating metrics have remained very weak, with negative free cash flow and earnings before interest and taxes. The first nine months of 2003 have shown deterioration in operating margin and cash flow generation as operating inefficiencies, pricing pressure, lower Ford volume, increased IT spend and the construction of the company's new headquarters took their toll on returns. Despite the sub par operating performance, however, Visteon's capital structure remains relatively strong. Book leverage was 40% with debt of $1.8 billion and tangible equity of nearly $3 billion at September 30, 2003. On a pro forma basis, after giving effect to the asset impairment and the deferred tax valuation non-cash charges that total up to approximately $950 million, book leverage increases to about 50%. However, liquidity is very solid. At the end of the third quarter, Visteon had a cash and marketable securities position of $943 million and unused bank revolving credit facilities totaling $1.3 billion with material adverse change representation only at closing. Since the fourth quarter is typically a strong cash flow quarter, Moody's anticipates that cash will be around $1 billion at year end. While Visteon had $101 million of commercial paper outstanding (which is expected to be repaid near-term), scheduled debt maturities are modest in 2004 with minimal cash pension contributions required. OPEB expenses, instead of rising, will decline by about $75 million due to the V/F Agreement. Ratings lowered include: Visteon Corporation: senior unsecured long-term issuer rating to Ba1 from Baa3; senior unsecured long-term notes and debentures to Ba1 from Baa3; senior unsecured issues, senior subordinated issues and preferred securities to be issued under the 415 shelf registration to (P)Ba1, (P)Ba2 and (P)Ba3 from (P)Baa3, (P)Ba1, and (P)Ba2, respectively; and unsecured short-term debt rating to Not Prime from Prime-3. Visteon Capital Trust I: guaranteed trust preferred securities to be issued under the 415 shelf registration to (P)Ba2 from (P)Ba1. Ratings assigned: Visteon Corporation: Ba1 for senior implied debt rating. The Visteon Corporation, headquartered in Dearborn, Michigan, is one of the world's largest automotive suppliers with annual revenues of $18.4 billion in 2002.