DBRS Comments on the American Axle and the UAW Agreement

DBRS notes that on May 28, 2008, American Axle & Manufacturing Holdings, Inc. (American Axle or the Company) disclosed further details pertaining to the four-year collective labour agreement (the New Agreement) reached last week with the United Auto Workers (UAW) union, UAW members having ratified the New Agreement with a supporting vote of 78%. While DBRS acknowledges the significant future cost reductions (outlined below) achieved by American Axle through the New Agreement, the ratings remain on Negative trend given the Company’s ongoing very high exposure to the sports utility vehicle (SUV) and light-truck models of General Motors Corp. (GM) and Chrysler LLC (Chrysler), which represented 78% and 12% of 2007 revenues, respectively.

The Company disclosed that it expects the New Agreement to reduce the UAW-represented hourly labour cost from an average of $73 to between $30 and $45 (depending on various wage and benefit packages by factory). Notwithstanding this reduction, the Company also revealed that it expects to reduce its current U.S. workforce of 3,650 by approximately 2,000 employees over the course of the next year through several announced measures, including early retirement, buyout offers, plant closures and layoffs. Specifically, American Axle’s forge operations in Detroit and Tonawanda, New York, will be closed, along with the previously idled driveline assembly facility in Buffalo.

In order to facilitate the transition to significantly lower wages, American Axle workers will be entitled to buy-down payments (to be paid in three instalments) in the range of $90,000 to $95,000. Additionally, employees have the option of a $55,000 early-retirement package or a payment of up to $140,000 to leave the Company outright. In aggregate, the Company estimates that these measures will cost between $400 million and $450 million. GM, American Axle’s largest customer, has agreed to provide support to the Company in the amount of $215 million. Going forward, annual savings from the New Agreement are estimated to be in the range of $300 million.

Given the measures outlined above, approximately 50% of the Company’s new business backlog will be produced for markets outside the United States. Additionally, approximately 85% of new business will be produced in non-U.S. operations. DBRS notes that on May 28, 2008, the Company also announced a new business backlog (from 2009 through 2013 in the amount of $1.4 billion), emphasizing enhanced business diversification going forward, with contracts to customers including, among others, Nissan Motor Co., Ltd., Renault S.A. and Chery Automobile Co., Ltd.

Notwithstanding the above, DBRS further notes that in the near to medium term, American Axle’s sales remain overly dependent on GM and Chrysler; namely, their SUV and truck platforms. While the combined exposure of approximately 90% would be deemed inordinately high in the best of circumstances, it is significantly exacerbated by the current economic challenges in the United States and the consequent decline in vehicle demand, combined with the increasing shift away from larger vehicles toward smaller, more fuel-efficient models given ever-increasing oil and fuel prices. Accordingly, no rating action is taken as a result of the New Agreement, with the trend remaining Negative. DBRS notes that the Company estimates the strike to have reduced 2008 sales by $370 million and accounted for a loss in production of about 250,000 vehicles. Combined with the very difficult market conditions, the Company now forecasts 2008 sales to be in the range of $2.5 billion to $2.6 billion, down significantly over 2007’s $3.25 billion.

Note:
All figures are in U.S. dollars unless otherwise noted.