DBRS Confirms Magna International Inc. at A (low)/R-1 (low), Trend Stable

DBRS has today confirmed the Issuer and Senior Debt ratings of Magna International Inc. (Magna or the Company) at A (low). Magna’s Commercial Paper rating has also been confirmed at R-1 (low). The trend on all ratings is Stable. The rating incorporates Magna’s strong business profile position as a global leading Tier 1 automotive supplier. Additionally, the Company’s financial profile remains very strong as a function of the Company’s historically very conservative financial policy, with Magna’s current credit measures bolstered by its recent record financial performance.

Conditions in the Company’s North American market have remained favourable and reflective of an ongoing automotive recovery. The U.S. light vehicle industry attained sales of approximately 14.5 million units in 2012 (significantly above the 10.4 million unit mark recorded in 2009) with further growth projected, as this market progressively reverts to secular demand levels (of approximately 16 million units). In Europe, the industry remains burdened by overcapacity, exacerbated by a decline in light vehicle demand as volumes have fallen to multi-decade lows in several markets (also aggravated by the continent’s economic challenges, significantly attributable to its sovereign debt crisis). In markets included in Magna’s Rest of World (RoW) segment, the Chinese automotive industry exhibited ongoing growth (albeit at more moderate rates vis-à-vis recent historically high levels), while volumes in Brazil were higher, given the extensions of industrialized products tax (IPI) tax cuts throughout 2012, which have thus far persisted.

In 2012, the Company’s attained record financial results. Revenues expanded by 7% (reaching approximately $31 billion) and EBIT increased by 24% to $1.5 billion(as calculated by DBRS) largely underscoring improved global production volumes, including an ongoing recovery in Magna’s key North American market, as well as higher tooling, engineering and other sales. These contributing factors were partly offset by lower complete vehicle assembly sales. While Magna is progressing in its efforts to attain further geographic diversification, the Company’s financial results remain largely dependent on its North American segment, which has accounted for approximately three-quarters of total operating earnings over the past four years. In Europe, Magna has made progress in turning around certain previously underperforming (and loss-incurring) operations, enabling the segment to generate a modest operating profit last year, compared to a slight loss the year before. In Magna’s RoW segment, its financial performance remains undermined by its growth efforts in the region, with this segment incurring losses largely reflecting costs related to the construction and launching of new facilities in Asia and in South America.

The Company made further acquisitions last year, totaling $525 million; these included three bolt-on acquisitions, in addition to acquiring the residual 27% controlling interest in Magna E-Car Systems partnership (E-car). Moreover, the Company attained record capital expenditures, reaching a level of $1.3 billion last year. Magna continued shareholder-friendly activities, with dividends growing modestly year-over-year. Management indicated that higher share repurchases are likely for 2013, with Magna’s board of directors recently authorizing the purchase of up to 12 million common shares under its current normal course issuer bid, terminating in November 2013 (as of March 31, 2013, the Company had repurchased approximately 1.6 million shares). DBRS notes that Magna’s very strong financial profile (with operating cash flow reaching a level of $2.2 billion), however, enables the Company to readily absorb these outlays.

The Company will continue to investigate acquisitions. DBRS notes that Magna could potentially consider a significantly larger acquisition than recently closed transactions. The supply base in Europe could appear to present several acquisition opportunities given the significant overcapacity at the industry level, exacerbated by considerable economic headwinds in the region. Magna is a potential consolidator in light of its scale, diversified operations and strong balance sheet. The Company has the capacity to execute a meaningful debt-financed acquisition (i.e., such that its total debt-to-total capitalization ratio would not materially exceed 30%) without affecting the rating, and DBRS expects Magna to continue adhering to a conservative financial policy when considering further acquisitions.

While industry conditions in Europe are expected to remain challenging, DBRS notes that this is partly offset by Magna’s European customer base, which consists largely of premium automotive OEMs whose sales are less volatile than the automotive sector average while also exporting significant vehicle volumes to markets outside of the continent. Additionally, prospects for the Company’s other markets are generally favourable over the near- to medium-term, supporting a stable outlook for the ratings. However, DBRS notes that, should Magna pursue a large-scale acquisition, or alternately deviate materially from the existing financial policy whereby the Company’s indebtedness would substantially increase, it would potentially trigger an event-driven review of the ratings.
Note:
All figures are in U.S. dollars unless otherwise indicated.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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