ArvinMeritor says capital structure behind spinoff of light vehicle systems business will lead to lower debt

By Jennifer Lanning Drey

Portland, Ore., May 28 - ArvinMeritor Inc. has developed a capital structure for the spinoff of its light vehicle systems business that the company believes will allow ArvinMeritor to maintain its current debt levels through the spinoff and continue reducing debt once it's complete, Mary Lehmann, vice president of strategic initiatives and treasurer of ArvinMeritor, said Wednesday.

ArvinMeritor's debt-to-EBITDA ratio is currently 4.1 times.

Under the plan, the spun off company, Arvin Innovation, Inc., will be launched with $100 million of cash, half of which will be designated for its day-to-day operations and the other half for near-term liabilities.

The funding of the plan calls for between $200 million and $250 million of borrowing arrangements at the launch, of which $125 million is expected to be drawn.

"If we did the spin today, those borrowing arrangements probably would take the form of asset-based bank facilities, but their final form will depend on conditions in the credit markets at the time of the spin," Lehmann said during a conference call held to update investors on the spinoff plans.

Once the debt is funded, Arvin Innovation will make a cash payment back to ArvinMeritor, which will be used to reduce debt, she said.

ArvinMeritor cannot pay down its public bonds maturing after 2011 without a credit line waiver but plans to apply the payment toward short-term borrowings, most notably on-balance sheet securitizations. The company also has a February 2009 debt maturity of $77 million that the cash payment could help finance, she said.

"With operating performance continuing to improve and the North American truck market coming back, as well as lower expenses from the transferred liabilities, we should be able to lower leverage meaningfully over the next 12 to 18 months," Lehmann said.

Comparable credit profiles

ArvinMeritor's spinoff capital structure also calls for Arvin Innovation to take on liabilities not directly related to its ongoing business in an effort to prevent overburdening ArvinMeritor relative to the spun off company.

With $125 million of debt at its launch, Arvin Innovation's net debt will be $25 million.

As a result, Arvin Innovation will take on a net unfunded position of pension and retiree health care of $209 million and an additional $32 million of other net liabilities that will be transferred from the parent.

"When we considered that ArvinMeritor today has almost $600 million of unfunded retiree health-care liability in addition to some underfunding of its pension obligations, the burden on Arvin Innovation looks reasonable to us," Lehmann said.

She later added that if the financial markets move in a direction that increases the options available to the company, Arvin Innovation might be launched with more debt and fewer liabilities.

"In total, we expect all of these actions to result in a comparable credit profile for the two companies," Lehmann said.

ArvinMeritor expects to complete the spinoff within the next 12 months.

Located in Troy, Mich., ArvinMeritor provides a range of integrated systems, modules and components to the motor vehicle industry.

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