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

DBRS Limited (DBRS) confirmed the Issuer Rating and Senior Debt rating of Magna International Inc. (Magna or the Company) at A (low) as well as its Short-Term Debt rating at R-1 (low). All trends remain Stable. The ratings reflect the Company’s solid business risk assessment as a global leading Tier 1 auto supplier with high technological capabilities. Magna’s financial risk assessment (FRA) also remains consistent with the ratings. Despite cost headwinds and slowing, but positive growth assumptions in major automotive markets, DBRS expects the Company’s future earnings to persist at solid levels as global light-vehicle production is still estimated to meaningfully increase over the medium term. Magna also has a strong track record of consistently outperforming the industry.

The Company’s operating performance remains favourable as 2018 revenues increased to record levels. Margins moderated somewhat year over year, although this is readily explained by (1) considerable growth in Magna’s complete vehicles business, which generates lower margins than the Company’s consolidated average, and (2) higher costs and investments in new automotive technologies. In Q1 2019, margins contracted further as a result of higher-than-anticipated expenses associated with Advanced Driver Assistance Systems technologies and softer results in Magna’s Power & Vision segment, notably in the Chinese joint ventures (equity-accounted), given lower transmission volumes. DBRS notes that these headwinds are not isolated to the Company – higher technological costs are pervasive across the automotive industry and the Chinese market is currently exhibiting negative growth – and considers them to be well manageable for Magna.

The Company continues to refine its product portfolio to more closely align with emerging automotive trends. To this end, Magna announced the divestiture of its Fluid Pressure & Controls business in Q3 2018 for approximately $1.2 billion with the transaction having closed in Q1 2019. The Company also made smaller acquisitions of companies involved in lighting and seating technologies. As such, Magna remains very well positioned to win ongoing original equipment manufacturer business with cross-collaboration capabilities across its various businesses representing an additional competitive advantage over its peers in the supply base.

Regarding Magna’s FRA, as of March 31, 2019, the Company’s debt-to-EBITDA ratio (adjusted for operating leases) was at 1.2 times (x). Magna’s current financial policy targets a debt-to-EBITDA range from 1.0x to 1.5x and the Company is committed to deploying excess cash to shareholders. Even at the upper end of this range, DBRS notes that credit metrics remain well commensurate 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 relative to the automotive supplier industry average.

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 2018), which can be found on dbrs.com under Methodologies & Criteria.

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

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada