DBRS Confirms Magna at BBB (high) with a Stable Trend

DBRS has today confirmed the ratings of Magna International Inc. (Magna or the Company), including Magna’s Senior Debt rating of BBB (high). The trend is Stable. The ratings action follows the Company’s recent announcement that the sale process for Adam Opel GmbH (Opel) has been terminated by General Motors Corporation (GM), removing some of the uncertainties associated with the potential Opel transaction. Additionally, the ratings action reflects slightly improving industry conditions for the Company with both GM and Chrysler Group LLC (Chrysler) increasing production following their respective exits from Chapter 11 bankruptcy protection in the United States. DBRS notes that the Company’s balance sheet has remained strong through the automotive downturn, providing further support for the ratings. While significant headwinds remain, the improvement in industry conditions, albeit protracted, together with ongoing cost reductions implemented by Magna should help stabilize its performance going forward. With this ratings action, the Company is removed from Under Review with Negative Implications where it was placed on May 1, 2009.

While DBRS considered the attempted Opel transaction to potentially be modestly beneficial to Magna’s business profile, it also noted that there were certain risks involved. First, original equipment manufacturers (OEMs) that are existing customers of the Company could have become hesitant to award future business to Magna, which might have been perceived as a direct competitor through its involvement with Opel. This could have resulted in some customer flight risk, although DBRS notes that Magna intended to establish a firewall to help mitigate concerns associated with any potential technology transfer. A further possible risk of the Opel transaction involved future additional investments of Magna associated with Opel that could have adversely impacted the Company’s financial profile. These uncertainties are now removed as a result of the termination of the Opel sale process, with Magna also indicating that it would not be looking to enter into any similar transactions with another OEM. DBRS notes that the Company’s existing business profile continues to be very solid as a global leading Tier 1 parts supplier, with its strong balance sheet enabling it to maintain investments in future technologies that should reinforce its competitive position going forward.

With respect to Magna’s financial profile, DBRS acknowledges that recent earnings have been weak relative to historical norms as a result of sharp declines in industry volumes across Europe and North America that in the latter case were exacerbated by the respective bankruptcies of GM and Chrysler LLC. However, DBRS also observes that the Company’s balance sheet nonetheless remained strong, with Magna maintaining a net cash position through the economic downturn. Liquidity has also been robust given cash balances of $1.4 billion as of September 30, 2009, with an additional $1.7 billion in remaining availability of credit lines. DBRS notes that in the most recent quarter ending September 30, 2009, the Company reverted to profitability as year-over-year industry declines in Europe moderated relative to sharp decreases in the first half of the year, while in North America industry volumes grew sequentially as Chrysler and GM increased production. DBRS notes that significant cost-cutting efforts have enabled Magna’s operations to return to profitability in North America amid what are still very low production volumes vis-à-vis historical norms. DBRS expects volumes in North America to further recover going forward, (for details please refer to the DBRS Canada Newsletter dated September 23, 2009) with the Company’s performance continuing to improve as a result. There remains some uncertainty with respect to the performance of Magna’s European operations in the near term given significant investments required to support upcoming product launches, with future vehicle demand also being potentially adversely impacted by the likely conclusion of some of the various vehicle scrappage programs implemented across that continent. However, DBRS considers these risks to be manageable.

DBRS expects the ratings to remain constant in the near- to medium-term, with Magna’s relative resilience through the automotive downturn likely precluding further negative rating actions subsequent to DBRS’s downgrade earlier this year (for details, please refer to DBRS’s press release dated March 5, 2009).

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 rating.