DBRS Morningstar Confirms Ratings on Magna International Inc. at A (low); Trend Remains Stable

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). All trends remain Stable. The rating confirmations reflect Magna’s solid business risk assessment (BRA) as a global leading Tier 1 automotive supplier with high-level and diverse technological capabilities that notably include complete vehicle assembly, thereby placing the Company in an excellent position to win business from new automotive entrants. DBRS Morningstar also notes that Magna’s financial risk assessment (FRA) remains commensurate with the assigned ratings as the Company’s operating performance and financial profile have proved quite resilient to industry headwinds, initially consisting of the Coronavirus Disease (COVID-19) and, more recently, the global semiconductor shortage and other supply chain challenges.

Magna’s 2021 profitability improved compared with 2020 earnings, which were significantly adversely affected by the coronavirus pandemic. While automotive production in 2021 remained subject to considerable disruptions, light vehicle production in North America and China was slightly higher year over year (YOY), partly offset by production declines in Europe. Amid this environment, the Company’s 2021 sales increased by 11% with the operating margin improving to 5.7% (compared with 5.1% in 2020) (as indicated by the Company). In addition to the higher sales volume, contributing factors included attained efficiency gains, lower warranty expenses and increased tooling contribution. These factors were partly offset by higher production costs (that included increases in commodity, freight, and energy costs), the non-repeat of various government support programs in 2020 related to the pandemic, increased launch costs, and net customer price concessions. In Q1 2022, Magna’s profitability decreased relative to the similar prior year period in line with continued challenges in global light vehicle production and ongoing cost headwinds, although annual earnings are estimated to range from essentially constant to moderately higher levels YOY amid an anticipated recovery in automotive production (albeit to a lesser degree than previously projected).

Magna’s solid FRA reflects its consistent operating performance amid a conservative financial policy that outlines a targeted debt-to-EBITDA (adjusted for operating leases) ratio in the range of 1.0 times (x) to 1.5x. While the Company’s debt-to-EBITDA slightly exceeded its target as of Q1 2022 (on a trailing 12-months basis), this was more than explained by earnings pressure as a result of ongoing constraints in automotive production, with Magna being on track to revert to its targeted debt-to-EBITDA range by the end of the year. DBRS Morningstar also notes that the Company’s liquidity remains strong, with cash and available credit lines as of March 31, 2022, amounting to $5.5 billion.

Going forward, DBRS Morningstar expects the Company’s earnings to be subject to progressive growth, reflecting ongoing moderate improvement in automotive production (from weak levels) amid considerable pent up demand that, for the time being, is estimated to more than offset possibly weaker consumer sentiment stemming from inflationary pressures, rising interest rates, and increased geopolitical uncertainty. Magna’s profitability stands to be bolstered further by implemented operational efficiencies. The Company appears well positioned to participate in the anticipated secular changes facing the automotive industry, including (among others) new mobility business initiatives and alternative powertrains; much of Magna’s current portfolio of products and services are already well aligned with the progressive electrification of the global automotive fleet. While the Company faces increasing capital expenditures and investments in line with the development of new technologies, these are estimated to be readily absorbed by Magna’s earnings/cash flow generation.

Consistent with the Stable trends on the ratings, DBRS Morningstar deems it unlikely that Magna will be subject to negative rating actions over the near to medium term, because of the Company’s conservative financial policy amid the above-cited rather favourable earnings outlook. In addition, DBRS Morningstar sees limited potential for positive rating actions over the foreseeable future, noting that the Company’s ratings remain quite dependent on its BRA, which is already at strong levels relative to the automotive supplier industry average.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
DBRS Morningstar considered that the social factor related to product governance represents a relevant factor as Magna’s portfolio of products and services, taking into further consideration the Company’s customer base essentially consisting of major global automotive OEMs, are subject to warranty, product liability, and recall costs that could potentially materially adversely affect the Company’s operations.

While the social factor could have some negative credit impact, DBRS Morningstar does not deem it sufficient to change the ratings or the trends assigned to Magna. There were no environmental or governance factors that had a significant or relevant effect on the credit analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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 14, 2021; https://www.dbrsmorningstar.com/research/385892), which can be found on dbrsmorningstar.com under Methodologies & Criteria. Other applicable methodologies include the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022; https://www.dbrsmorningstar.com/research/396929).

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.

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

DBRS Morningstar will publish a full report shortly that will provide additional analytical detail on this rating action. If you are interested in receiving the report, contact us at [email protected].

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

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