DBRS Places Magna Under Review with Negative Implications

DBRS has today placed the ratings of Magna International Inc. (Magna or the Company) Under Review with Negative Implications. The ratings action reflects the impact of the sharp decline in North American vehicle demand and associated production, which has become much worse than previously anticipated by DBRS. Additionally, market conditions in Europe have also become much weaker recently, with the outlook for both major markets remaining very bleak for the foreseeable future. More significantly, Magna’s continuing high exposure to the U.S. based OEMs negatively affects the Company’s outlook.

The dramatic volume declines of the Detroit 3 have prompted these companies, notably General Motors Corporation (GM) and Chrysler LLC (Chrysler), to seek urgent funding from the U.S. government. The recent decision of the U.S. Senate to reject the proposed $14 billion bailout legislation further undermines the critical liquidity position of these two companies. While GM and Chrysler may yet receive funding assistance, it will likely be of a minimal amount deemed just sufficient to enable them to maintain operations through the transition to the Obama administration. GM and Chrysler may still undergo bankruptcy proceedings, in which case Magna’s cash flow would be adversely impacted by the diminished collectability of the associated receivables.

The Company’s third quarter results were below DBRS’s expectations. Total sales amounted to $5.5 billion, which represented a 9% decline over the similar prior-year period. Additionally, Magna recorded a net loss of $215 million (including unusual items totalling $234 million), relative to a net profit of $177 million generated in Q3 2007. The Company’s lower results are a function of significantly weaker external production sales in North America and depressed complete vehicle assembly sales that more than offset gains recorded in other business segments. The results reflect weak industry conditions in North America that have persisted throughout 2008, but which have become much more severe in recent months given the ongoing financial crisis and reduced access to credit that has significantly impeded vehicle demand. Additionally, conditions in Western Europe are now also projected to be significantly weaker over the coming year as the North American economic challenges have proliferated globally.

DBRS notes that the Company’s exposure to the Detroit 3 is of particular concern as GM, Ford Motor Company (Ford) and Chrysler together represent the significant majority (i.e., more than 80%) of Magna’s North American business. Each of the Detroit 3 has significantly underperformed vis-à-vis already weak industry levels, as the product offerings of these companies (primarily pick-up trucks and SUVs) have fallen into disfavour, given increasing fuel costs (notwithstanding the significant moderation in fuel prices the past two months). Production volumes of the affected models have been significantly curtailed. However, reduced credit access and much lower consumer confidence have driven sales sharply lower the past few months from levels that were already very weak in the first half of this year. The accelerated cash burn of the Detroit 3 has resulted in their urgent quest for immediate funding from the U.S. government; the absence of which would likely trigger the eventual bankruptcy of both GM and Chrysler. Under any potential scenario, future production volumes of the Detroit 3 will continue to contract significantly, further negatively affecting Magna’s North American business.

DBRS notes that Magna’s financial profile continues to be very solid. As of September 30, 2008, the Company had a net cash position of $1.7 billion, with the Company’s coverage metrics continuing to be representative of the assigned ratings. Magna’s liquidity is further bolstered by its remaining availability of $1.9 billion in unused credit lines.

DBRS also recognizes the Company’s efforts to further diversify itself geographically through its continuing expansion into lower cost countries. However, these progresses are readily overwhelmed by the current severe market conditions, particularly in the United States and Europe. DBRS will continue to monitor Magna’s ability to absorb the sharp industry downturn, including an assessment of the Company’s eventual fourth quarter results. In the event that the expected further contraction of industry volumes leads to associated losses and material cash burn, this would likely have negative ratings implications.

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

The applicable methodology is Rating Automotive Suppliers, which can be found on our web site under Methodologies.

This is a Corporate rating.