Lear Corp. Nearing the End

Rumors have spread that auto parts manufacturer Lear Corp. (LEA) will file for Chapter 11 bankruptcy by the first week of July. This move seems likely as the company is struggling hard to restructure its huge debts from the past few months.

The company was hit hard in the second half of 2008 due to the ailing industry conditions and capital market disruptions. This led Lear to borrow $1.2 billion under the primary credit facility during the fourth quarter of 2008.

However, the company breached the leverage ratio covenants in the credit facility. Consequently, it entered an amendment with the lenders under its credit facility to waive the existing defaults until June 30, 2009. In addition, the company is also obliged to pay a total of $38.4 million as interest payments on its senior notes due 2013 and 2016.

Although Lear spokespersons have clearly denied talks of bankruptcy in the near future, circumstances indicate just the opposite. The company has been posting losses since the third quarter of 2009. Lear's loss escalated to $2.2 billion in the first quarter of 2009. The company had $3.5 billion in debt at the end of the quarter.

Further, the company has been severely affected by steep production cuts by Ford Motor Co. (F - Analyst Report) and bankruptcy filing by General Motors (GMGMQ), both accounting for 42% of revenue.

News leaked that Lear is recently in talks with banks for debtor-in-possession loans, which are provided to companies under the Chapter 11 bankruptcy process. Thus, Lear may soon share the fate of Visteon and Metaldyne -- the two bankrupt auto suppliers thus far in 2009.