Thursday, July 2, 2009

Lear Bankruptcy: More Than Meets the Eye?

Lear Corp.'s imminent bankruptcy filling, prefaced by it's failure to make a $38M bond payment, is unlikely to even dominate the news cycle for more than 15 minutes; probably due to the fact that, in the wake of GM "collapsing into the Government's arms", it isn't too shocking that the world's largest supplier of automotive interior products would have some issues. We also think that Joe-sixpack is probably unaware that Lear Corp. booked $17.8B in revenue in 2006. Let's not fool ourselves: this is a Major Bankruptcy.

The interesting aspect of Lear's trouble is that the majority - roughly four out of every five dollars - of Lear's revenue is attributable to business conducted Outside of the United States. Additionally, GM only accounted for 23% of the Company's revenue in 2008. This all said, we would argue that Lear is much more a barometer of the Global Auto Market than of the US auto market. Are we talking about re-de-decoupling?

Fortunately for auto maker's supply chains, Lear has apparently already arranged $500M in DIP financing; a hurdle that quality visitors to bankruptcy court seem to have had no problem with recently (think Smurfit-Stone). Ultimately though, we see this as a process that will have to play itself out again and again until an actual recovery can occur. Clearly, Lear accumulated too much debt during the heyday of US auto sales; as a company judged by the market to possess a sound underlying business, it is getting what amounts to a pass for this period of profligacy. For many zombie corporations that exist today in America however, there will be no pass; there will be no DIP financing, and there will be no collecting $200. These companies will vanish into the wind, leaving behind a wake of destruction in the form of unpaid creditors. Hundreds of billions of dollars worth of capital that once fueled corporate growth, will essentially be lost. That is what a deleveraging process looks like.

*no positions, thankfully

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