Fitch Downgrades Lear to 'BB+'; Outlook Remains Negative.

CHICAGO -- Fitch Ratings has downgraded Lear Corp.'s issuer default rating (IDR), senior secured bank lines, and senior unsecured notes to 'BB+' from 'BBB-'. The Outlook remains Negative. The downgrade reflects Fitch's concerns regarding limited free cash flow generation

due to a weakened operating profile, which increases the potential for further balance sheet deterioration in the near-term. In addition, the company potentially has up to $717 million in maturities coming due in 2007. Of the total $717 million, $317 million is attributable to the first put date of a convertible debt issue with an equity strike price in excess of $60 per share and $400 million is a maturing term loan. However, the company has adequate liquidity with approximately $1.5 billion in available revolver. While Lear is likely to experience negative free cash flow for full year 2005, Fitch expects the company to be breakeven to slightly positive free cash flow in 2006, mitigating the extent of Fitch's rating downgrade to one notch.

Issues that impaired Lear's recent negative free cash flow performance include higher raw material costs, significantly lower customer volumes of SUV products on which Lear has a substantial amount of content, a one-time extension of customer payment terms, costs associated with restructuring, as well as increased capital spending due to a heavy North American launch schedule in 2005 and investment in new technology.

During 2005, launches representing 40% of Lear's North American revenue reduced the company's operating leverage. Also, the Ford Explorer, General Motors' (GM) truck based SUVs, and the Dodge Durango -- some of Lear's highest contented vehicles -- all saw production declines in excess of 30% in 2005. Compounding the decline in operating leverage, the Explorer and the GM SUV products constituted a large portion of the 2005 launches.

In 2006, Fitch expects Lear's free cash flow to improve as a result of operating leverage from the 2005-launched new business, more stable customer SUV production volumes, ramp-up of 2006 new business programs, lower capital investment, and initial cost savings from 2005 restructuring efforts. Fitch believes that SUV production should continue to decline but not in the erratic way or to the degree which volumes were reduced by automakers in 2005, barring prolonged gas prices around $3 per gallon. Fitch also assumes continued high raw material costs.

Longer term, Fitch projects Lear could return to sustainable free cash flow performance and to reduce debt. The company continues to be an innovator, demonstrated by the 'flexible seat architecture' technology launched in new products this year as well as advances in interior electronics. Lear has successfully attracted new customers, increasing non-U.S. Big 3 business to about 46% of total revenue and to roughly 50% of $4 billion in total new business backlog (2005 through 2007). Fitch sees minimal execution risk in the company's restructuring plan, which includes relocating operations in low-cost countries and should be completed in late 2006 to early 2007. Total cash cost is expected to be around $205 million, excluding proceeds from asset sales. However, operating income should improve by $100 million to $125 million in 2007 as a result of these actions. Also in 2007, Fitch believes there could be some relief from raw material costs.

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.