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Fitch Downgrades TRW's IDR to 'B+'; Remains on Watch Negative

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  Published in House and Home on Thursday, February 26th 2009 at 11:02 GMT, Last Modified on 2009-02-26 11:03:45 by Market Wire
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NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded TRW's (NYSE: TRW) ratings as follows:

TRW Automotive Holdings Corp.

--Issuer Default Rating (IDR) to 'B+' from 'BB-'.

TRW Automotive Inc.

--IDR to 'B+' from 'BB-';

--Senior unsecured notes to 'B-/RR6' from 'B+'.

In addition, Fitch's existing ratings and assigned Recovery Ratings (RRs) are as follows:

TRW Automotive Inc.

--Senior secured revolving credit facility at 'BB/RR2';

--Senior secured term loan A facility at 'BB/RR2';

--Senior secured term loan B facility at 'BB/RR2'.

All ratings remain on Rating Watch Negative where they were placed on Dec. 11, 2008. The ratings cover approximately $3.2 billion in outstanding debt.

The downgrades are prompted by ongoing weakness in the global automotive industry which has exhibited a sharper drop than Fitch previously expected. Fitch expects global automotive market weakness to continue through 2009, with first quarter-2009 (1Q'09) being the quarter with the steepest decline in sales. Weak demand will hurt EBITDA and could pressure TRW's cash flow. TRW has been working to restructure its operations and adjust to the cuts in auto production, partially offsetting the negative impact of declining production rates. Although TRW has weathered the U.S. decline to date, the steep production cuts in the U.S. and Europe in 4Q'08 and 1Q'09 should outpace the restructuring benefits to the cost structure. TRW also benefits from the refinancing actions it took in 2007, which lowered the company's interest costs and extended debt maturities. Additionally, Fitch believes TRW has the ability to decrease capital expenditures in 2009, which may be necessary if cash flows are constrained. Furthermore, Fitch forecasts modest negative free cash flow in 2009 under the current auto production assumptions. Factors supporting the ratings include TRW's relatively diverse customer base, global manufacturing presence, the company's technology-driven products and liquidity position.

The ratings remain on Rating Watch Negative as discussed in the Dec. 11, 2008 Fitch commentary titled 'Fitch Places Seven U.S. Auto Suppliers on Rating Watch Negative.' As discussed in the aforementioned commentary, the Rating Watch Negative is based on the impact of a potential bankruptcy filing by General Motors (GM). Given its smaller profile, it is unlikely that a bankruptcy filing by Chrysler would have the same impact.

The RR reflects Fitch's recovery expectations under a scenario in which distressed enterprise value is allocated to the various debt classes. The RR on the senior secured facilities (revolving credit facility, Term Loan A, and Term Loan B) was established with a rating of 'RR2', which implies a recovery in the range of 71-90%. The senior unsecured notes were assigned an RR of 'RR6', which implies a recovery in the range of 0-10%.

In the event of a GM bankruptcy, Fitch believes that the resulting contraction in auto production, the supply chain, trade credit and capital access would cause widespread shutdowns and bankruptcies throughout the supply chain. Fitch notes that even if the original equipment manufacturers (OEMs) avoid bankruptcy, major restructurings of their operations will occur, causing material changes in the operations of their Tier I suppliers. In the event of a GM bankruptcy, Fitch's prospective IDR for TRW could be lowered.

Earlier this month, TRW announced it drew down the bulk of its $1.4 billion revolving credit facility, and the proceeds were placed on the balance sheet to build liquidity. The company has indicated that this was done to provide it with some protection due to the uncertainty regarding the government's financial support of GM and Chrysler.

TRW's liquidity was ample at the end of 2008, totaling nearly $2.1 billion. This liquidity consisted of $756 million of cash, $1.113 million of availability under the company's revolving credit facility, and $249 million under several receivables securitization facilities. Fitch also notes that the fourth quarter is a seasonally high period for cash due to working capital. TRW has no near-term debt maturities and the revolver extends through 2012. Fitch calculates leverage (total net debt to operating EBITDA) at year end 2008 to be 2.1 times (x). If industry conditions worsen through 2009, TRW could pressure its leverage covenants and Fitch expects that TRW will need to work with its lenders for an amendment later in 2009. The secured credit facility requires that the net leverage ratio be no more than 3.75x as of 4Q'08 until 3Q'09; from 4Q'09 and beyond it may be no greater than 3.5x. Fitch expects lenders would be willing to work with TRW to provide covenant relief given the company's position as a global auto supplier with a diverse customer mix and product offering.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, '[ www.fitchratings.com' ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.