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, including Magna’s Senior Debt rating of BBB (high). The rating action follows yesterday’s announcement by Chrysler LLC (Chrysler) that it has filed for Chapter 11 bankruptcy protection in the United States (for details, please see the April 30, 2009, DBRS press release). In DBRS’s March 12, 2009, rating report on Magna, we indicated that the bankruptcy of any of the Detroit Three would trigger an event-driven review of the ratings. DBRS notes that Chrysler remains a significant customer of Magna, with the Detroit Three collectively representing close to 40% of the Company’s 2008 revenues. As Chrysler yesterday also indicated that production will be significantly curtailed during the bankruptcy process, the associated impact on Magna’s earnings and cash flow may be significant. While the Obama administration anticipates that Chrysler could potentially emerge from bankruptcy relatively quickly (i.e., in 30 to 60 days), DBRS notes that there remain several uncertainties with respect to the bankruptcy process, and it is not inconceivable that Chrysler’s period under such protection could extend significantly further.

Chrysler’s actions have exacerbated prevailing industry conditions that were already very challenging, with lower production volumes in line with the severe drop in automotive demand resulting from the global economic downturn. Through the first four months of 2009, Chrysler, Ford Motor Company (Ford) and General Motors Corporation (GM) have all cut production sharply in an effort to align inventories with lower industry volumes and declining market shares. Additionally, DBRS further observes that GM may also declare bankruptcy in the coming months, which could trigger a further drop in production and adversely affect Magna’s operating results.

DBRS recognizes Magna’s position as a leading global Tier 1 supplier. Additionally, the Company’s financial profile remains strong and well above the auto-parts industry average. As of year-end 2008, Magna continued to have a net cash position. The Company’s liquidity is further bolstered by available credit lines totalling close to $2 billion. However, in the event of a protracted bankruptcy of Chrysler and lengthy production shutdowns of any of the Detroit Three, Magna’s credit metrics could deteriorate to levels that are no longer commensurate with the currently assigned ratings.

DBRS will monitor the ongoing developments in the automotive industry, particularly in North America, with respect to Chrysler and GM and their restructuring efforts. In turn, Magna’s operating results through the first half of 2009 will demonstrate how resilient the Company is to the severe industry conditions, including the potential of extended production shutdowns. In the event that the Company’s losses prove significant and result in a material deterioration of its credit metrics, this would likely lead to further negative rating actions.

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

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

This is a Corporate rating.