Capital Markets

Lear Puts Off $38 Million Notes Payments to Save Bank Loans

If GM's fourth-largest creditor had made the interest payment, Lear's banks could have speeded up the company's schedule for paying back its loans.
David KatzJune 1, 2009

Lear Corp., one of General Motors’ biggest creditors, announced today that it has decided to take advantage of a 30-day grace period and not make semi-annual interest payments of about $38 million on senior notes it has issued.

Mel Stevens, vice president of communications for Lear, told CFO.com that the decision didn’t stem from GM’s bankruptcy filing today. Instead, he said, the company decided to put off paying the interest on the notes to deter its major bank lenders from terminating a waiver of defaults under Lear’s $2.3 billion credit facility. (The facility consists of a $1.3 billion revolver and a $1 billion term loan.)

If Lear had made the payments, Stevens said, “what could happen is, the banks could accelerate demand for payments.”

On May 13, Lear entered into an agreement with its banks to extend a waiver of Lear’s existing defaults through June 30. Under the terms of the agreement, the waiver of covenant defaults under the primary credit facility would terminate if the company made any payments on its senior notes.

The $38 million in interest payments on its 8.50% Senior Notes due in 2013 and 8.75% Senior Notes due in 2016 had been due today. Instead, Lear is using the 30-day grace period applicable to the interest payments “while it continues discussions regarding a capital restructuring with its lenders and others,” according to the company.

Under the indentures relating to the Senior Notes, the use of the 30-day grace period wouldn’t spawn a default “that permits acceleration of the Senior Notes or any other indebtedness,” according to the company.

A supplier of automotive seating systems and electrical distribution systems, Lear is GM’s fourth largest trade creditor at $44.81 million, according to Reuters. Lear had $1.2 billion in cash and cash equivalents as of April 4.