RATINGS RATIONALE

"The affirmation of TMD Friction's CFR at B2 positively reflects the company's ability to reduce its senior secured notes by an amount of EUR 63 million since its takeover by Nisshinbo in November 2011. The repurchase of the notes was fully funded by the company's parent Nisshinbo through subordinated shareholder loans which in our view underpins Nisshinbo's strong commitment to provide TMD Friction with financial support", says Rainer Neidnig, a Moody's Vice President and lead analyst for TMD Friction. "However, weaker than expected financial results for the first quarter of 2012 together with the currently challenging macroeconomic environment in Europe offset these benefits to a certain extent and position TMD Friction's rating adequately in the B2 category", adds Mr. Neidnig.

In May 2012, TMD Friction has redeemed EUR 43 million worth of its senior secured notes. This was for the second time in 2012 that the company repurchased parts of its notes with funds provided by Nisshinbo (NISH) through subordinated shareholder loans. We positively note that these intercompany loans are non-cash interest bearing debt and will save TMD Friction approximately EUR 7 million of annual cash interest going forward. Moreover, due to their subordinated nature, Moody's considers 50% of these shareholder funds as equity which consequently leads to a reduced leverage at TMD Friction. As of today, EUR 97 million worth of TMD Friction's senior notes remain outstanding. Applying Moody's loss-given-default (LGD) methodology the indicated rating on the notes is unchanged at B2 as shareholder loans are excluded from Moody's LGD model due to their equity-like characteristics. Finally, as a result of TMD Friction's enhanced ownership structure following the acquisition by NISH, Moody's decided to slightly soften its triggers for a possible change of the company's rating as specified below.

TMD Friction's B2 rating in Moody's view continues to benefit from the company being part of a larger and more diversified industrial group. Its single owner NISH is a publicly listed holding company with subsidiaries that are active in textiles, automobile brakes, papers, mechatronics, chemicals and electronics. According to TMD Friction, the combination with NISH's automobile brake business creates the world's largest automotive brake friction manufacturer. The combined companies are expected to generate revenues of over EUR1 billion and employ more than 6,000 people. Moody's believes that the opportunities associated with the company's new ownership structure (e.g. joint purchasing and marketing activities) outweigh potential risks in connection with the still ongoing integration process or challenges associated with the combination of two different corporate cultures. In the fiscal year ending 31 March 2012, NISH generated JPY 379 billion in revenues (approximately EUR 3.5 billion) and operating profit of JPY 4.2 billion (circa EUR 39 million) after an operating profit of JPY 20 billion in FY2011. Following the acquisition of TMD Friction at the end of 2011 and due to the effects from the earthquake in Japan in 2011, estimated adjusted leverage of NISH has been relatively high at 9.7x debt/EBITDA for the fiscal year ended March 2012, but is expected to reduce in the current fiscal year with the full year contribution from TMD Friction and a continued recovery of Japan's economy.

At the same time, Moody's notes that TMD Friction's CFR remains constrained at B2 due the company's weak financial performance in the last quarter of 2011 and first quarter of 2012. While revenues of EUR 657 million for the last twelve months period ending March 2012 bottomed out at FY2011 levels, EBITDA as adjusted by Moody's declined slightly to EUR 50 million for the same period from EUR 51 million in FY2011. As of March 2012 TMD Friction's leverage on a Moody's adjusted basis stood at 4.6x debt /EBITDA. Pro forma the EUR 43 million worth of senior notes being replaced by subordinated debt from NISH in May 2012, Moody's adjusted leverage ratio for TMD Friction's improves to 4.2x debt/EBITDA.

Main reasons for the company's weaker than expected first quarter performance were persistently high and volatile raw material prices (e.g. copper, tin or steel) as well as a marked decline in demand from most of its original equipment manufacturing customers (OEMs) in Europe apart from the German and UK premium carmakers. In addition, TMD Friction was faced with slowing demand from China where local customers delayed several vehicle production plans and volume losses in its independent aftermarket segment due to unseasonably mild weather in Europe and general concerns over the economic environment, particularly in the UK and Southern Europe. Lastly, we caution that TMD Friction generated 86% of its 2011 group revenues in Europe where the overall macroeconomic environment currently continues to be challenging.

TMD Friction's B2 CFR is based on the following: (i) the company's strong position in the original equipment market and the aftermarket for automotive brake pads and linings; (ii) the fact that a large proportion of its revenues are generated in the usually more resilient aftermarket; (iii) the company's advanced technologies, which allow it to supply OEM customers worldwide despite region-specific product requirements; (iv) its established and solid relationships with automobile manufacturers and auto equipment suppliers; and (v) its operating footprint, which benefits from a reduced cost base on the back of successful rationalization and cost-cutting initiatives in recent years.

The stable outlook on TMD Friction's ratings is based on Moody's expectation that the company will gradually reduce its leverage to levels close to 4x debt/EBITDA on an adjusted basis during 2012. Furthermore, we expect the company to at least maintain its current profitability and to achieve free cash flow around breakeven in 2012.

WHAT COULD CHANGE THE RATING UP/DOWN

Moody's would consider upgrading TMD Friction's ratings if the company were able to (i) generate EBIT margins above 4%; (ii) reduce leverage to 3.5x debt/EBITDA or lower; (iii) achieve an interest coverage of well above 1.0x EBIT/interest expense and; (iv) return to positive free cash flow on a sustainable basis.

Conversely, downward pressure on TMD Friction's ratings could arise if the company were to fail to (i) improve EBIT margins to at least 3%; (ii) return to free cash flow above breakeven; and (iii) reduce leverage levels to close to 4.0x debt/EBITDA. The rating would also come under pressure should TMD Friction -- contrary to expectations -- start upstreaming cash to its owner, by dividend payments or other means.

The principal methodology used in rating TMD Friction Group S.A. was the Global Automotive Supplier Industry Methodology published in January 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009 . Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

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Rainer Neidnig Vice President - Senior Analyst Corporate Finance Group Moody'sDeutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Matthias Hellstern Associate Managing Director Corporate Finance Group JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 Releasing Office: Moody's Deutschland GmbH An der Welle 5 Frankfurt am Main 60322 Germany JOURNALISTS: 44 20 7772 5456 SUBSCRIBERS: 44 20 7772 5454 (C) 2012 Moody's Investors Service, Inc. and/or its licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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