DBRS Confirms Magna, Changes Trend to Positive

DBRS 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 trend on the ratings has been changed to Positive from Stable. The trend change reflects the substantially improved financial performance of the Company amid a moderate recovery in the global automotive industry, with aggregate vehicle production up significantly in North America, which has typically accounted for the majority of earnings. Additionally, DBRS notes that Magna has benefited from its significant exposure to the Detroit Three, particularly Ford Motor Company (Ford) and General Motors Company (GM). Ford was able to significantly increase its U.S. market share amid considerable product momentum, while GM maintained its leading position, with market share holding firm in 2010 (following previous declines associated with its former bankruptcy and elimination of certain brands).

The ratings remain underpinned by Magna’s strong business profile as a global leading Tier 1 automotive supplier. Additionally, Magna’s financial profile continues to be robust as a result of its persistently conservative financial policy. DBRS notes that the Company’s credit metrics have been materially bolstered as coverage measures have effectively returned to strong historical levels, with Magna’s balance sheet being very solid given nominal leverage and a substantial net cash position in excess of $2 billion.

Magna’s 2010 financial results were much improved over 2009 levels, when the Company incurred operating and net losses amid the automotive downturn. Operating income was strong at $1.2 billion, mostly reflective of a material increase in production volumes in primary markets, with cost efficiencies globally and improvements in some underperforming operations also supporting earnings.

In North America, production volumes through 2010 increased by 39% from very weak 2009 levels. Production volumes also increased in Western Europe (albeit at a more moderate rate of 12% over 2009), as the region benefited from vehicle scrappage programs that supported sales early in the year, with production volumes also bolstered by higher exports of European vehicles to other global markets. Magna’s revenues were further positively affected by higher content per vehicle in both regions. The Company also made progress in the diversification of its revenue base, with its Rest of World production sales increasing by 53% year-over-year and exceeding $1 billion for the first time in its history (although this still represents only 4% of total sales).

Magna’s strong financial profile enabled it to sustain investments through the recent economic downturn. Capital expenditures in 2010 were 25% higher relative to the prior year, with the Company looking to further increase its diversification efforts given significant investment in markets such as Brazil, Russia, India and China (BRIC). Magna made acquisitions last year, although the aggregate amount was modest, at approximately $100 million, and readily absorbed by its strong balance sheet.

Going forward, DBRS expects the Company’s profitability to remain solid in 2011. Based on Magna’s outlook, DBRS expects the Company’s operating earnings to be moderately higher year-over-year, with higher commodity and raw material costs and the cost of new greenfield facilities representing partial offsets to the earnings impact of further revenue growth. Production volumes in North America are expected to increase further this year relative to 2010, as volumes last year were still weak vis-à-vis levels prior to the downturn. In Europe, 2011 production volumes are projected by the Company to be approximately level year-over-year, with economic headwinds linked to the fiscal challenges of certain member nations persisting. Rest of World production sales are expected to increase further in 2011, but will still represent a minor portion of revenues and earnings. Magna, however, does remain committed to geographic diversification. Capital expenditures in 2011 are projected by the Company to increase by up to 40% year-over-year, with a significant amount of this investment to be allocated toward new facilities and expanding Magna’s Rest of World production capacity. DBRS notes that these increased investments will be readily absorbed by Magna’s operating cash flow, with the Company expected to be significantly free cash flow positive this coming year. The Company will continue to look at acquisitions. DBRS notes that Magna could potentially complete a significantly larger acquisition than recently closed transactions. However, DBRS expects Magna to maintain its historically conservative financial policy when considering further acquisitions.

DBRS considers Magna’s ratings to be subject to positive action given the Company’s expected favourable performance amid industry volumes that are forecast to progressively increase. However, DBRS notes that certain headwinds do remain. Among these are potentially volatile oil/fuel prices linked with civil unrest in various significant oil-producing regions. DBRS notes that a sharp and sudden spike in fuel prices could again derail a recovery of the automotive industry, particularly in the Company’s core North American market. However, if despite these headwinds Magna continues to trend in line with its strong recent performance and does not materially deviate from its historically conservative financial policy, this would likely lead to a ratings upgrade.

Notes:
All amounts are in U.S. dollars unless otherwise indicated.

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