DBRS Confirms Magna at BBB (high) and R-2 (high)
Autos & Auto SuppliersDBRS has today confirmed the Senior Debt rating of Magna International Inc. (Magna or the Company) at BBB (high) and its Commercial Paper rating at R-2 (high). The confirmation reflects Magna’s strong business profile as a global leading Tier 1 automotive supplier. The trend on the ratings remains Stable. Although DBRS recognizes that the Company’s recent financial results are weak relative to historical norms, this fact was incorporated in DBRS’s March 5, 2009, downgrade of Magna. DBRS also notes that the Company’s recent losses are primarily reflective of severe conditions across key end markets rather than specific company performance. Additionally, Magna’s financial profile continues to be robust as a result of its persistently conservative financial policy, with the Company having a significant net cash position.
Magna recently released its year-end 2009 financial results, which were considerably lower year over year, with operating and net losses incurred. The reduced earnings are a function of a severe contraction in production volumes in primary markets. In North America, production volumes through the first half of 2009 dropped by 50% year over year as a result of the economic and automotive downturn, with the bankruptcies of General Motors Corporation (GM) and Chrysler LLC (Chrysler) and their associated production shutdowns further exacerbating matters. In Europe, production declines were also significant, albeit not as severe as in North America, as vehicle scrappage incentives bolstered demand significantly, effectively moderating the drop in volumes. Magna Steyr’s complete vehicle assembly sales also declined by 47% in 2009, reflecting the very challenging environment as well as the upcoming 2010 scheduled end of production of some models assembled by the Company. While Magna implemented several cost reductions and efficiency countermeasures in response to the downturn, they were more than offset by sharply lower volumes.
However, DBRS notes that the worst of the downturn has likely passed as the Company’s sales increased progressively through the year, with Magna reverting to profitability in the third quarter. Even though fourth-quarter results were negative, DBRS notes that the loss was exacerbated by further downsizing activities as well as due diligence costs associated with the planned investment in Adam Opel GmbH (Opel).
Notwithstanding the weaker results, Magna has nonetheless proved relatively resilient amid the challenging conditions. DBRS notes that the Company’s average dollar content per vehicle continued to increase in North America and Europe. Additionally, Magna’s leading technical capabilities and strong balance sheet enabled the Company to assume “takeover” business from distressed competitors in the amount of approximately $1 billion, with margins on this business typically above the Company average. Magna also continued to diversify its revenue base, with its Rest of World production sales increasing by 31% and remaining profitable (albeit this segment still accounted for only 4% of total sales).
Magna’s strong financial profile has enabled it to sustain investments through the liquidity crisis. DBRS notes that the Company acted on consolidation opportunities in the sector, acquiring Cadence Innovations s.r.o. (Cadence) in the Czech Republic, as well as various facilities of Meridian Automotive Systems, Inc. (Meridian) located in the United States and Mexico. More recently (in February 2010), the Company announced the acquisition of Karmann Japan Co. Ltd. (Karmann), with Magna also negotiating to acquire Karmann’s German and Polish operations. Furthermore, the Company has continued to invest in electric and hybrid vehicle technologies and is partnering with Ford Motor Company (Ford) in developing a battery-powered vehicle that is to be publicly available in 2011. Magna’s ability to continue investments at a time when many other competitors were burdened with liquidity concerns should serve to increase the Company’s future competitiveness.
Going forward, DBRS expects the Company to revert to profitability in 2010, with Magna’s ongoing efficiency initiatives further bolstering results. However, earnings will likely be modest. While production volumes in North America are expected to increase this year relative to 2009, volumes will still be weak vis-à-vis levels prior to the downturn. Additionally, complete vehicle assembly sales (Magna Steyr) in Europe will still be sharply lower relative to historical highs (largely due to the scheduled production end of the high-volume BMW X3), while European production volumes are also projected to decline moderately as previously implemented vehicle scrappage programs (which were highly successful and likely pulled forward considerable demand) are phased out in certain markets in 2010. Furthermore, the fiscal challenges of various European nations may also further undermine economic growth in the region.
DBRS expects Magna’s ratings to remain constant in the medium term, with the Company’s solid financial profile being readily sufficient to absorb any further volatility that may arise in the near future. However, the Company’s exposure to the Detroit Three remains a concern, particularly with respect to Chrysler, whose eventual production levels remain uncertain. Longer term, Magna continues to be very well positioned to benefit from an eventual recovery in the automotive sector.
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 & Auto Suppliers) rating.