DBRS Comments on Magna’s Recent Statements Regarding its Financial Policy

DBRS notes that on January 15, 2014, Magna International Inc. (Magna or the Company) announced certain clarifications concerning its financial policy going forward. Of particular significance, the Company disclosed details with respect to its evolving capital structure and targeted future debt levels. While DBRS acknowledges that the new debt targets suggest that Magna’s future leverage will likely increase somewhat relative to historical norms, DBRS also observes that the targeted debt levels remain consistent with the currently assigned ratings, with Magna’s short- and long-term ratings remaining unchanged at R-1 (low) and A (low), respectively, both with a Stable trend.

DBRS points out that Magna’s financial policy was historically highly conservative. Moreover, Magna had previously communicated that it would progressively adopt a more “appropriate” (i.e., less conservative) capital structure that would still enable it to maintain high investment-grade credit ratings. Magna’s most recent announcement clarified matters further by outlining explicit quantitative targets; specifically, the Company’s debt (adjusted for operating leases)-to-EBITDAR ratio would be in the range of 1.0 times to 1.5 times within two years. (Note: As of September 30, 2013, Magna’s adjusted debt-to-EBITDAR ratio stood at 0.8 times, as calculated by DBRS.)

The prospective increase in debt levels effectively provides Magna with added financial flexibility to pursue its growth objectives or undertake additional shareholder-friendly activities, such as dividends and/or share repurchases. With respect to its growth objectives, the Company has made numerous acquisitions in recent years, although these have typically been of the “bolt-on” variety and moderate in size. Magna is a potential consolidator in light of its scale, diversified operations and financial flexibility. DBRS is of the opinion that the Company could consider a significantly larger acquisition, with the supply base in Europe potentially presenting several acquisition opportunities given the significant overcapacity at the industry level, exacerbated by ongoing (if slightly dissipating) economic headwinds in the region. In the event that the Company were to pursue a substantial acquisition, DBRS notes that this could potentially result in Magna reaching its targeted debt ceiling somewhat sooner than the suggested two-year horizon.

Magna’s earnings performance has been consistently solid following the global economic downturn of 2008-2009, reflective of the Company’s assigned short- and long-term ratings of R-1 (low) and A (low), respectively, both with a Stable trend. While the Company’s new debt targets would remain consistent with the current ratings, DBRS notes that such an increase in leverage would nonetheless effectively reduce the Company’s cushion, (which is significant at Magna’s current debt profile), against unexpected challenges at this rating level. This notwithstanding, despite variances across major regional market segments, global conditions for the automotive industry are generally quite favourable. Accordingly, the Company’s recently announced financial outlook for 2014 projected operating margin growth (estimated to be in the mid-6% range) amid ongoing sales increases (forecast to range from $33.8 billion to $35.5 billion).

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

The applicable methodology is Rating Companies in the Automotive Supplier Industry, which can be found on our web site under Methodologies.