DBRS Confirms Magna International Inc. at A (low) with Stable Trends

DBRS Limited (DBRS) confirmed the long- and short-term ratings of Magna International Inc. (Magna or the Company) at A (low) and R-1 (low), respectively, with Stable trends. The ratings reflect the Company’s solid business risk assessment as a global leading Tier 1 auto supplier of strong technological capabilities. Magna’s financial risk assessment (FRA) also remains consistent with the ratings. DBRS expects the Company’s future performance to remain solid amid industry conditions that appear rather favourable, with moderate increases in global automotive production expected to persist over the near to medium term.

Magna’s operating performance remains on track as sales and earnings in 2017 and Q1 2018 increased to consecutive record levels, with the Company’s EBIT margin remaining roughly constant at levels above 7%. Effective 2018, Magna adopted a new reporting format, with prior geographically based segments replaced by new product-oriented segments better aligned with the Company’s current management structure while also increasing transparency to investors. Magna continues to focus on expanding its technological capabilities, with examples including the Company’s partnership with Lyft to fund and develop self-driving systems as well as planned joint ventures in China toward the engineering and complete vehicle manufacturing of electric vehicles. This has enabled Magna to capitalize on industry trends (including, among others, the consolidation of global vehicle platforms, vehicle lightweighting and the increasing penetration of active safety technologies and alternative powertrains). As a result, the Company’s organic growth over the past several years has consistently outpaced that of the industry, with DBRS expecting such to continue over the foreseeable future.

As with all its peers, Magna faces trade headwinds as a result of tariffs imposed by the United States on steel and aluminum in addition to uncertainty regarding the renegotiation of the North American Free Trade Agreement. While the Company potentially faces additional costs associated with these trade challenges, DBRS expects such to be manageable. Moreover, with numerous facilities in each of Canada, the United States and Mexico, Magna has considerable flexibility to optimize its manufacturing footprint and mitigate any negative impact(s) of restrictive trade policies.

Regarding Magna’s FRA, as of March 31, 2018, the Company’s debt-to-EBITDA ratio (adjusted for operating leases) was at a level of 1.2 times (x). Magna’s current financial policy targets a debt-to-EBITDA range from 1.0x to 1.5x, with the Company committed to deploying excess cash to shareholders. Even at the upper end of this range, DBRS notes that credit metrics remain well consistent with the assigned ratings. Accordingly, given Magna’s projected solid operating performance and absent a marked shift in its financial policy, DBRS does not anticipate any negative rating actions over the near to medium term. Conversely, DBRS sees limited potential for positive rating actions over the foreseeable future given the high level of the current ratings in the context of DBRS’s aggregate risk assessment of the automotive supplier industry.

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

The principal methodology is Rating Companies in the Automotive Manufacturing and Supplier Industries (October 2017), which can be found on dbrs.com under Methodologies.

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 Documents or by contacting us at info@dbrs.com.

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

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

DBRS will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving this report, contact us at info@dbrs.com.