DBRS Downgrades Magna to BBB (high)

DBRS has today downgraded the Senior Debt rating of Magna International Inc. (Magna or the Company) to BBB (high) from “A”. Magna’s Commercial Paper rating has also been downgraded to R-2 (high) from R-1 (low). The trend on the ratings remains Stable. The rating action reflects severe automotive industry conditions that have meaningfully reduced the Company’s earnings and cash flow prospects over the near to medium term. DBRS also notes that the automotive downturn has placed considerable pressure on the supply base, which is expected to undergo significant consolidation over the near to medium term (although this will likely present opportunities for Magna to absorb takeover business, given its strong balance sheet and liquidity position). Exacerbating this is Magna’s continuing high exposure to the Detroit 3 (and their receivables), two of which are currently obtaining support funding from the U.S. government (with other governments expected to follow suit). With this rating action, Magna has been removed from Under Review with Negative Implications, where it was placed on December 16, 2008.

The Company recently released its fourth-quarter and full-year 2008 results, both of which were considerably below prior year levels. More significantly, DBRS notes that the results became particularly weak during the last quarter of the year, when automotive markets in Europe declined precipitously along with those in North America, where volumes were falling throughout the year but dropped especially sharply from October to December.

The sudden contraction in industry volumes reflects the global proliferation of the well-documented economic challenges initially sourced in the United States. Much lower consumer confidence and restricted access to credit have had a severe, negative effect on automotive demand and production. This sharp automotive contraction, along with the frozen credit markets, created a liquidity crisis for both General Motors Corporation (GM) and Chrysler LLC (Chrysler).

While these two companies have thus far averted formal bankruptcy proceedings, both continue to lose market share amid declining overall vehicle volumes. This has impacted Magna given its exposure to these original equipment manufacturers (OEMs) and their North American vehicle platforms. Additionally, in the event of a bankruptcy of either Chrysler or GM, the Company’s earnings would likely be affected, at least on a one-time basis. Absent the bankruptcy scenario, DBRS does not expect Magna to use significant amounts of cash, based on current expected production levels.

However, notwithstanding the significant challenges over the near term, DBRS notes that Magna does remain a leading Tier 1 supplier. Furthermore, despite the recent weak results, its financial profile continues to be solid, with the Company having a net cash position and strong liquidity. This places it in an excellent position to win further takeover business from financially distressed suppliers. DBRS also recognizes Magna’s efforts to further diversify its sales by vehicle segment (i.e., increasing its exposure to car and CUV platforms), customer and geography. The Company has also gradually increased its relative manufacturing footprint in lower-cost countries, which will improve its cost position going forward. As such, Magna’s competitive profile remains very solid, with the Company standing to reap significant gains in the long term in the context of a consolidated supplier base in an automotive industry that ultimately remains poised for global growth, primarily driven by expected further gains in emerging markets. In light of this, DBRS has assigned a Stable trend to the ratings. With respect to the significant near-term pressures, DBRS does not expect the Company to burn a significant amount of cash in 2009, despite the depressed production levels that are expected to persist through the year. However, in the event of a bankruptcy of either Ford or GM, this would trigger an event-driven review of the ratings.

Notes:
The applicable methodology is Rating Automotive, which can be found on our website under Methodologies.

This is a Corporate rating.