DBRS Confirms Magna International at A (low)

DBRS has today confirmed the Issuer Rating and Senior Debt ratings of Magna International Inc. (Magna or the Company) at A (low). DBRS has also assigned a Short-Term Debt rating of R-1 (low). The trend on all ratings is Stable. The rating incorporates Magna’s solid business profile, as one of the world’s leading Tier 1 auto suppliers, as well as the Company’s strong financial profile. As previously noted by DBRS in its press release dated June 12, 2014, the Company has announced a change in its financial policy, nonetheless, DBRS notes that Magna’s credit metrics are projected to remain consistent with the current rating levels.

During the first half of 2014, Magna undertook a number of steps to re-align its capital structure. In January, Magna publically communicated its intentions to bring the Company’s Debt (adjusted for operating leases)-to-EBITDAR ratio within the range of 1.0 times (x) to 1.5x within two years, up from below 1.0x since 2011. DBRS notes that this range remains consistent with the current rating.

In June of 2014, Magna issued $750 million ten-year Senior Unsecured Notes, under a short-form base shelf prospectus which was filed in the first quarter of 2014 and which allows for the potential offering of up to $2 billion of debentures. The issuance was for general corporate purposes and has effectively brought Magna’s pro forma adjusted debt-to-EBITDAR ratio to approximately 0.9x on an LTM basis as at March 31, 2014, as calculated by DBRS, remaining in-line with the current rating.

The Company had also continued to make share repurchases in 2014 under its normal course issuer bid (NCIB), which allows Magna to repurchase up to 20 million shares and that expires in November, 2014. In 2012 and 2013, the Company repurchased 0.8 million Common Shares and 14.1 million common shares, respectively. DBRS notes that the share repurchases remain incorporated into the current rating.

The Company’s operating performance has been quite favourable over 2013 and through the first quarter of 2014. Magna recorded revenue growth of approximately 13% during the year and a further 7% in Q1 of 2014. Earnings remained strong, supported by improving volume, productivity and an incremental margin on new programs. The North American market has remained favourable in 2013 as the U.S. light vehicle industry attained production volumes of approximately 16.2 million. In Europe, industry production volumes contracted slightly during 2013, before improving 8% in Q1 of 2014. In Asia, the market continues to perform quite well, noting that Chinese production improved to record levels in 2013. In markets included in Magna’s Rest of World (RoW) segment, industry developments were mixed as production volumes in Brazil declined slightly.

DBRS notes that Magna is the third largest automotive supplier with a global manufacturing footprint. The business profile further benefits from Magna’s substantial technological capabilities, noting the leading market shares across the product portfolio. Additionally, the Company has made progress in its efforts to attain further geographic diversification of revenues, with sales outside of traditional North American and Western European markets accounting for approximately 13% in 2013, up from single digits in years prior. This notwithstanding, the Company continues to rely significantly on the North American segment, with the segment accounting for approximately half of total sales and the majority of total operating profit in 2013, primarily representing the Detroit Three manufacturers.

The revenue and earnings outlook over the near to medium term is positive. Despite variances across major regional market segments (such as challenging conditions in South America) global conditions for the automotive industry are generally favourable. Accordingly, the Company’s financial outlook for 2014 projects operating margins to be in the mid- to high 6% range with sales expected to be in the range of $34.9 billion to $36.6 billion. The positive sales and earnings outlook is also expected to support Magna’s cash flow generation and credit metrics, which are expected to remain in-line with the current rating levels.

The financial profile is nonetheless expected to become slightly less conservative. As the Company progressively approaches its financial policy targets, in the absence of material strategic growth opportunities (whether organic or by means of acquisition), DBRS would expect share repurchases and debt issuances to continue, with the Company targeting adjusted debt-to-EBITDAR around 1.0x to 1.5x by the end of 2015.

With positive prospects for the Company’s markets over the near to medium term, DBRS notes that the trends are currently Stable; however, should Magna pursue a large-scale acquisition, or alternately deviate materially from the targeted financial policy whereby the Company’s indebtedness would substantially increase, it would potentially trigger an event-driven review of the ratings.

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

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 Companies in the Automotive Supplier Industry, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.