1

Rating Trends and Outlook

Auto Industry, Capital Goods &

Automotive Parts Suppliers

Moody’s 2002 Corporate Finance Credit Outlook Investor Briefing

New York, January 15, 2002

2

Auto Industry and Capital Goods

Bruce Clark

Senior Vice President

3

Agenda

• Global auto industry challenges

• Regional auto challenges - U.S., Europe and Japan

• Rating implications

• Capital goods sector

4

Global Industry Challenges

Excess capacity - 57 mil. produced vs over 70 mil. capacity

Ongoing cyclicality and concurrent downturns

Mature markets - U.S., Europe and Japan

Growth Markets - Asia, Latin America, Eastern Europe -

timing?

Intensifying competition - Product and geographic

expansion, product development time

Huge investment requirements

Flawed operating and financial model?

5

US Industry Challenges

Profit concentration

SUV, Trucks, Minivans

Growing international competition in these segments

Minimal profitability in cars

Brand image and average age of customers

Excess capacity - plant & people

Weak international operations

Cyclical downturn

6

US Vehicle Sales Trend

9

10

11

12

13

14

15

16

17

18

19

201

97

0

19

72

19

74

19

76

19

78

19

80

19

82

19

84

19

86

19

88

19

90

19

92

19

94

19

96

19

98

20

00

20

02

E

Moody’s Estimation RangeMoody’s Estimation Range15M - 15.5M Unit Sales15M - 15.5M Unit Sales

Uni

ts (

in m

illio

ns)

7

Big-3 Net Income

-7,000

-6,000

-5,000

-4,000

-3,000

-2,000

-1,000

0

1,000

2,000

3,000

4,000

5,000

6,000

7,00019

80

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

GM Ford Chrysler

US

$ (i

n m

illio

ns)

8

Ability to Address Challenges

Position of strength in SUVs, trucks & minivans

Narrowing gap on quality

Adequate liquidity for downturn

Willingness to address operating model

problems

Past recoveries

9

Rating Implications

Recent rating actions

Near-term focus:

Ability to hold share

Restructuring effortsScope

Cash costs

Cash benefits

Assumptions - market, share, pricing

Timing and magnitude of recovery

10

Rating Implications

Where should ratings settle???

Timing and magnitude of financial recovery

Likely range of future operating and financial volatility

11

European Industry Challenges

Block exemption expiration

End-of-life regulations

In roads by Japanese - more capacity

New facilities in Eastern Europe

Consumer migration - value for money and prestige

12

Europe Vehicle Sales Trend

7

9

11

13

15

1719

70

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

E

Uni

ts (

in m

illio

ns)

13

Japanese Industry Challenges

Weak economy

Stratification of competitors

Operating model can accommodate slack demand

14

Japan Vehicle Sales Trend

3

4

5

6

7

8

9

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

E

Uni

ts (

in m

illio

ns)

15

Rating ProspectsThe formidable

Toyota Aa1 Stable

BMW A1 Stable

Honda A2 Stable

The hopefulRenault Baa2 Stable

Nissan Baa3 Stable

Hyundai Ba2 Stable

The watchedVW A1 Stable

Peugeot A3 Stable

The challengedGM A3 Negative Fiat Baa2 Negative

Ford A3 Rev DG Mitsubishi Ba3 Stable

DCX A3 Negative Mazda Ba3 Stable

16

Capital Goods

Paccar A1 - Stable

CAT A2 - Stable

Deere A2 - Negative

Ingersoll-Rand A3 - Negative

Cummins Baa3 - Negative

Navistar Ba1 - Stable

CNH Ba3 - Negative

17

Capital Goods Rating Issues

Ongoing cyclicality

Hold fundamental competitive position

Long-term viability of the industry

Robustness of returns on up-side vs

Weakness on the down-side.

18

Automotive Parts Suppliers

George A. Meyers

VP/Senior Credit Officer

19

Background

Downgrades in 2001 reflect:• Shrinking volumes with high fixed costs• margin pressure• high debt burdens• diminished cash flows• liquidity issues• weakening debtholder protection measures

20

Deteriorating Credit Metrics

Average Interest Coverage (x)

0

2

4

6

8

10

12

14

1996 1997 1998 1999 2000 9/01

Note: The average reflects figures from selected Auto Suppliers

21

Deteriorating Credit Metrics

Average Total Debt:Capital

0%

10%

20%

30%

40%

50%

60%

1996 1997 1998 1999 2000 9/01

Note: The average reflects figures from selected Auto Suppliers

22

Deteriorating Credit Metrics

Average Retained Cash Flow:Total Debt

0%

50%

100%

150%

200%

250%

1996 1997 1998 1999 2000 9/01

Note: The average reflects figures from selected Auto Suppliers

23

Downgrades Reflect Industry’s Downturn

Auto Suppliers Average Rating History

A1

A2

A3

Baa1

Baa2

Baa3

Note: The average reflects ratings of selected Auto Suppliers

24

Pessimistic Outlook for 2002

• Volumes down again– volatility and duration concerns

• Margin pressure– pricing demands from OEMs– implications for further cost reduction measures

• OEM concentration and market share erosion• Business/Product/Geographic diversity

25

• Cash flow generation– from operations– proceeds from asset sales

• Sensitivity analysis• Working capital

– now a source, but for how long?

• Can capital expenditures really be cut back?– lean manufacturing initiatives

• Dividend cuts

Reduced Cash Flows Need Help

26

• Financing flexibility– balance sheets strained– mergers and stock buybacks– Banks and investors - sector disfavor

• Funding sources - diversity• Financial covenant headroom• Near-term maturities• Contingent liabilities - rating trigger risks

Liquidity - Can Companies “Weather” the Downturn

27

• Deteriorating fundamentals continue• Break-even levels need to be reduced,

suggesting more restructuring actions• OEM concentration and pricing demands are

concerns• Reduced cash flow generation heightens

liquidity concerns• More downgrades and outlook changes likely

in 2002

Summary