DBRS Downgrades ArvinMeritor to B, Trend Negative

DBRS has today downgraded the ratings of ArvinMeritor Inc. (ARM or the Company) to B from BB (low). The rating action follows ARM’s recent decision to discontinue its efforts to spin off its Light Vehicle Systems (LVS) business as a whole; this will place significant added pressure on the Company’s financial profile over the near to medium term. The rating action also incorporates the current severe downturns in both the automotive and commercial vehicle markets. The trend is Negative, as very difficult market conditions are expected to persist in 2009 and quite possibly through 2010. With this rating action, ARM is removed from Under Review with Negative Implications, where it was placed on May 6, 2008.

In May 2008, the Company made its original announcement of its intention to spin off the LVS business. Initially, the divestiture was expected to be implemented through a pro-rata tax-free dividend to ARM shareholders. Subsequently, in October 2008, the Company indicated that it was considering other alternatives to complete the separation, including a potential sale. However, given the weakness of the automotive industry in addition to challenges in the credit markets, ARM has concluded that it presently cannot complete the attempted transaction under what it considers to be acceptable conditions.

Accordingly, the Company has elected to divide the LVS business into three segments: body systems; chassis systems; and wheels. ARM has disclosed its intention to retain the wheels segment. However, the Company will continue to explore options regarding the ultimate exit from the body systems and chassis systems segments. DBRS notes that while LVS provided diversification benefits to ARM’s business profile, the segment historically generated significantly lower margins than the Company’s core Commercial Vehicles Systems business.

In addition to difficulties surrounding the planned divestiture of the LVS business, ARM is also facing very weak conditions in both the commercial vehicle and automotive markets. Commercial vehicle production in North America declined further in 2008 from already low 2007 levels. The outlook for 2009 continues to be weak in view of the challenging economic environment, although there may be a slight rebound in the second half of the year in connection with pre-buying activity in advance of new emissions regulations that come into effect in 2010. In Europe, the commercial vehicle market struggled during the second half of 2008 and is expected to contract considerably in 2009.

With the Company retaining the LVS segment for the time being, ARM remains exposed to the automotive market. Industry sales for 2008 were very weak, particularly in North America, where total light vehicle sales in the United States reached approximately 13.5 million units; the lowest level since 1992. The outlook for 2009 is even bleaker, with lower sales levels forecasted for North America and Europe as economic challenges and low consumer confidence hinder any recovery over the near term. ARM’s financial profile is therefore subject to further adverse developments given the sharply lower automotive production volumes expected over the near term to match supply with the much weaker demand levels.

In response to the challenging environment, ARM has slashed production and reduced its workforce. Plant personnel were reduced by 11% over the last three months in 2008, with extended shutdowns at all plants. Discretionary spending has been slashed and the Company is reviewing its capital expenditure programs.

ARM’s financial profile materially deteriorated in fiscal 2008 (ending September 30, 2008). Before extraordinary items, the Company incurred a net loss of $91 million. Leverage also increased significantly, with total debt-to-capitalization as of September 30, 2008, amounting to 75%, which is very aggressive for a cyclical company. Liquidity, however, should be satisfactory. In December 2007, the Company renegotiated its senior secured bank revolver at $700 million, with the new facility featuring a revised covenant package that significantly enhanced availability. As of September 30, 2008, $626 million remained available under this facility, in addition to cash balances of $497 million, which combined would appear to be readily sufficient to cover short-term debt obligations of $240 million. DBRS notes that the Company’s long-term debt maturity schedule remains favorable, with no significant amounts due until 2012.

However, the sharp downturn in both the commercial vehicle and automotive markets significantly undermines ARM’s outlook, especially with the Company retaining the LVS segment for now. In the event that further sudden declines in production place additional strains on the Company’s financial profile or result in a material reduction in liquidity (i.e., restricted availability of bank lines, non-compliance with covenants), a further downgrade would be likely.

Notes:
All figures are in U.S. dollars unless otherwise noted.
The applicable methodology is Rating Automotive Suppliers, which can be found on our website under Methodologies.
This is a Corporate (Autos and Auto Parts) rating.