DBRS Morningstar Confirms Magna International Inc. at A (low), Negative; Removes UR-Neg. Status

DBRS Limited (DBRS Morningstar) 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). The trend on the ratings is Negative, reflecting significant headwinds facing both the automotive original equipment manufacturers (OEMs) and the supply base in connection with the global escalation of the Coronavirus Disease (COVID-19). However, DBRS Morningstar estimates that the Company’s financial risk assessment (FRA) will remain at levels commensurate with the existing ratings, notwithstanding a softening of Magna’s credit metrics as a result of coronavirus (pursuant to the to the moderate scenario outlined in the DBRS Morningstar commentary “Global Macroeconomic Scenarios: Application to Credit Ratings” initially dated April 22, 2020, and subsequently updated on June 1, 2020). With this rating action, Magna’s ratings are removed from Under Review with Negative Implications, where they were placed on April 13, 2020.

DBRS Morningstar notes that prior to the coronavirus outbreak, the Company’s FRA was at solid levels (providing moderate cushion in the context of the current ratings) because of Magna’s consistent operating performance and conservative financial policy. Consistent with automotive OEMs and Magna’s major peers across the supply base, the coronavirus pandemic materially affected the Company’s operations globally, initially in China in January 2020 and subsequently across Europe and North America (as well as several other smaller jurisdictions) in March 2020. In line with the trajectory of the pandemic, Magna’s Q1 2020 financial results were correspondingly softer (compared with the similar prior-year period) as the Company reported sales of $8.7 billion and adjusted EBIT of $403 million; Magna indicated further that the coronavirus negatively affected sales and EBIT by the amounts of approximately $1.1 billion and $250 million, respectively. DBRS Morningstar expects Magna’s annual sales to decline by more than 20% compared with 2019 levels with earnings also being significantly affected (albeit anticipated to remain at positive levels). With respect to free cash flow generation, this will decrease correspondingly with lower earnings, exacerbated by negative working capital; however, DBRS Morningstar notes that such effects are less consequential than with the OEMs.

Consistent with its industrial peers, Magna implemented several countermeasures in response to coronavirus. From a financial perspective, these include heightened cost management (facilitated by the Company’s decentralized operating structure), reductions in discretionary capital expenditures, and the suspension of share repurchases. Additionally, Magna is assessing quarterly dividend payments (that persisted in Q1 2020) on an ongoing basis. The Company also upsized its revolving credit facility (RCF) to $1 billion from $300 million while extending the maturity thereof to April 2021. As a function of the above, Magna’s liquidity as of March 31, 2020, on a pro forma basis (reflecting the increased RCF) amounted to $4.9 billion. DBRS Morningstar deems the Company’s liquidity position to be sufficient to withstand any reasonably foreseeable scenario associated with the pandemic. Finally, Magna also filed a base shelf prospectus to issue up to $2 billion of debt securities over a 25-month period, pursuant to which the Company issued $750 million in senior unsecured notes in June 2020.

DBRS Morningstar notes that the resiliency in automotive sales and production thus far have slightly exceeded DBRS Morningstar’s initial expectations. In China, automotive production substantially restarted in February and March 2020. Industry sales in China have been trending positively (albeit from lacklustre levels), with the China Association of Automobile Manufacturers indicating that monthly sales improved in April and May 2020 by 4.4% and 14.5%, respectively, relative to the similar prior-year periods. In Europe, subject to market conditions, all OEMs have restarted production. Somewhat similarly in North America, automotive production essentially recommenced in the latter half of May 2020. U.S. sales have also somewhat rebounded as, following a decline in monthly sales of more than 50% in April 2020, U.S. sales in May were estimated to be down by roughly 30% (as indicated by Cox Automotive; in both cases compared with the similar prior-year period), with a similar trend persisting in June. Moreover, across all these major market regions, the ramp-up in production has thus far progressed well, with no significant delays in major programs currently anticipated. However, DBRS Morningstar notes that the above-cited progresses could be undermined in rapid manner in the event of a meaningful escalation of coronavirus.

Consistent with the Negative trend on the ratings and recognizing the ongoing uncertainty regarding the ultimate severity and duration of coronavirus, DBRS Morningstar notes that a further progression of the pandemic (such that it readily approximates the adverse scenario as outlined in the above-cited commentary) could result in additional downward rating pressures. Conversely, should the worst effects of coronavirus be significantly contained through the first half of 2020 and followed by a meaningful recovery in the remainder of the year, the trend on the ratings could be changed to Stable.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at https://www.dbrsmorningstar.com/research/357792.

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

The principal methodologies are Rating Companies in the Automotive Manufacturing and Supplier Industries (October 28, 2019) and DBRS Morningstar Criteria: Rating Corporate Holding Companies and Parent/Subsidiary Rating Relationships (November 25, 2019), which can be found on dbrsmorningstar.com under Methodologies & Criteria.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

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 [email protected].

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar trends and ratings are under regular surveillance.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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