Lear Corp.'s five-year credit default swaps tightened 50-60 basis points to 800 on the market's expectation the company will seek amendments to leverage covenants contained in its revolving credit facility. A trader said the company is likely to trip leverage covenants and that amendments would help it maintain liquidity. Expectations that the company will receive an amendment gave a boost to the unsecured debt; Lear's 8.11% '09 bonds traded up to 94 1/2 from 90 3/4.
According to a filing with the Securities and Exchange Commission, Lear had a defined leverage ratio of 2.7 times at the end of December 2005, which is below the maximum 3.75 times ratio it is allowed under its bank agreement. The defined leverage covenant is due to step down to 3.25 times at the end of the second quarter of 2006 from 3.75 times at the end of 2005.
Lear officials did not return calls seeking comment. A spokesman for JPMorgan, which leads Lear's revolver, declined comment. The company entered into a $1.7 billion revolver in March 2005, when it replaced an existing, restated $1.7 billion revolver, which was due to mature in March 2010. In August, it revised the leverage ratio covenant for the third quarter of 2005 through the first quarter of 2006, and also entered into a new 18-month term loan facility for up to $400 million.
One banker said that because the bonds have a negative pledge clause, he does not anticipate the lenders trying to do an entire new deal and will instead just amend the existing facility and its covenants. Investors said a conference call has not been set up yet, but another banker said the company is pretty close to making a decision.
Last week, Moody's Investors Service lowered Lear's corporate family and senior secured debt ratings to B2 from Ba2, reflecting the deterioration in Lear's operating performance. It anticipates leverage at the company to remain high in the near term. Edwin Wiest, a senior analyst at Moody's, said Lear has about $700 million of bank debt and bonds maturing in February 2007. He added that although the ratings agency expects the company to be profitable, its debt covenant ratio is more reflective of a single B credit.
