Fitch Affirms Lear's IDR at 'B'; Downgrades Sr. Unsec. to 'B/RR4'; Outlook Negative.

CHICAGO -- Fitch has taken rating actions on Lear Corp. (Lear) as follows:

-- Issuer Default Rating (IDR) affirmed at 'B';

-- Senior secured bank debt upgraded to 'BB/RR1' from 'B+/RR3';

-- Senior unsecured debt ratings downgraded to 'B/RR4' from 'B+/ RR3'.

The upgrade of the senior secured bank facilities (and the downgrade of the unsecured securities) reflects the enhanced security package supporting the new bank facilities versus the facility that was previously in place. The enhanced collateral weakens the protection and potential recovery of unsecured holders. The collateral for the new facilities consists of physical assets in a current amount of approximately $400 million, which is below the threshold that would trip unsecured bond indentures and result in pari-pasu status with the banks in respect to the collateral. The new agreement also pledges the stock of certain subsidiaries, particularly the more profitable foreign subsidiaries, which provide the bulk of the incremental collateral support versus the prior bank agreement.

Lear's Rating Outlook is Negative. An 'RR1' recovery rating indicates an expected recovery rate of 90-100% if the company were to seek Chapter 11 protection while the 'RR4' rating on the unsecured debt indicates an expected recovery range of 30-50%.

Under the amended and restated credit facility completed on April 25, Lear established a $1 billion term loan in addition to the $1.7 billion revolving credit that was maintained. The facility provides meaningful improvement in the company's financial flexibility providing Lear with funding to meet near term maturities, and also provides significantly relaxed coverage and leverage covenants that extend into 2008.

The facility effectively pushes out 2007 debt maturities into 2012. The company had a $400 million term loan and a $317 million puttable bond (with a first put-date) due in February 2007. Lear also has funds set aside to address its 2008 and 2009 maturing debt with the remaining amount of the $1 billion term loan. While the deferred maturities provide Lear the financial flexibility to focus on its restructuring efforts in the interim, Fitch maintains concern regarding Lear's exposure to General Motors and Ford Motor, and in particular, to the large sport utility vehicles of these manufacturers. Fitch recognizes that Lear has won a substantial amount of new business from non-Big 3 customers. However, the extent of the company's dependence on Ford and GM will make it difficult to sustainably enhance margins over the next several years.

Collateral under the credit agreement is inclusive of, but not limited to, 100% of the equity in domestic subsidiaries and 65% of the equity in foreign subsidiaries as well as company assets up to 5% of the total consolidated assets, the amount allowed under the senior unsecured indentures. This carve-out for the senior secured debt is approximately $400 million, but could change over time with changes in Lear's consolidated assets. Fitch believes that the value of the carved-out assets plus the equity value of foreign subsidiaries, provides sufficient recovery for the senior secured bank debt over and above the unsecured holders such that the position of the senior unsecured debt holders has become impaired on a relative basis.

Given the stresses facing the company's domestic operations, Fitch ascribed them a limited value on a liquidation basis, with most of the consolidated recovery value attributed to the going concern valuation of the equity in foreign operations. This would assume the overseas operations are not placed into bankruptcy, as has been the case in recent bankruptcies in the sector.

Lear's first quarter ended April 1 was on track with expectations, but continuing cost and revenue pressures, plus potential volatility in OEM production, indicate that Lear will have to realize benefits from its restructuring program in the second half of 2006 in order to reach their target of positive free cash flow.

Fitch's Recovery Ratings (RR), introduced in 2005, are a relative indicator of creditor recovery on a given obligation in the event of a default. A broad overview of Fitch's RR methodology as it relates to specific sectors, including a Case Study webcast, can be found at www.fitchratings.com/recovery.

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.