DBRS Downgrades American Axle & Manufacturing to BB (high); Trend Remains Negative

DBRS has downgraded the ratings for American Axle & Manufacturing Holdings Inc. (AAM or the Company) to BB (high) from BBB (low), and the trends remain Negative. The rating action is based primarily on the increased business risk facing AAM mainly related to the issues facing General Motors Corporation (GM), and weaker-than-expected financial performance. The Negative trend reflects the risk of intensifying industry challenges, notably lower-than-expected light truck demand at GM and the Chrysler Group (AAM’s second-largest customer), which could weaken the Company’s credit profile.

AAM’s customer and product mix is highly focussed on GM (76% of total sales in 2006) and its light truck operations. AAM supplies the bulk of the axles (front and four-wheel drive/all-wheel drive) for GM’s light-truck and SUVs manufactured in the United States, where demand has been negatively impacted mainly by intense competition and shifting consumer preference towards smaller, more fuel-efficient vehicles. The steady decline in GM’s market share and production has led to a corresponding increase in AAM’s business risk profile.

DBRS expects the declining production trend to continue over the near term, and mitigate the benefits of an expected content per vehicle increase related to the full launch of products under the GMT-900 platform. Lower production volumes, combined with continuing OEM pricing pressure, high input costs, and limited customer/product diversification are likely to limit a material improvement in AAM’s profitability over the medium term. In addition, the Company also faces the risk of labour disruptions at the North American Big Three (UAW contract negotiations commence in September 2007). Sharply lower earnings and free cash flow in the event of intensifying industry challenges would further pressure AAM’s balance sheet, and have negative implications for the rating.

Despite the various challenges facing AAM, the Company is expected to remain profitable. AAM remains an efficient auto parts producer, and has implemented restructuring initiatives to improve its cost base. The Company’s recent special attrition program, along with other restructuring plans, is expected to reduce structural costs (i.e., labour, increased capacity utilization) going forward and improve its competitiveness. In addition, AAM is focussed on expanding its production capacity in low-cost regions and diversifying its product/customer mix, which should improve earnings stability over the medium term. Furthermore, the lack of large debt maturities before 2010 provides flexibility.

Note:
This rating is based on public information.