DBRS Morningstar Confirms Ratings on Magna International Inc. at A (low), 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 favourable business risk assessment 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 solid, notwithstanding its recently increased leverage as the Company incurred approximately $1.6 billion in additional indebtedness earlier this year, primarily toward the funding of its forthcoming acquisition of the Veoneer Active Safety business. Moreover, Magna remains committed to its historically conservative financial policy, with the Company aiming to revert to its targeted leverage range (outlined by Magna as adjusted debt-to-adjusted EBITDA being in the range of 1.0 times (x) to 1.5x) by YE2024.

The Company’s 2022 results reflected softer earnings caused by supply chain disruptions and volatile automotive production schedules (mitigated by Magna’s continuous improvement plans). Moreover, the Company experienced cost pressure including European energy costs, exacerbated by the Russia-Ukraine conflict. Despite these challenges, the Company continued to outgrow its markets. While adjusted EBIT in 2022 declined to USD 1.66 billion from USD 2.06 billion in 2021, cash flow generation remained sound. Magna also remained free cash flow positive, notwithstanding materially higher capital expenditures year over year. In Q1 2023, Magna continued to outperform the industry (with revenues increasing by 11% compared with Q1 2022), although adjusted EBIT margins moderated further to a level of 4.1%, significantly reflecting higher net production input costs.

Going forward, DBRS Morningstar expects the Company’s earnings to be subject to steady growth given anticipated increases in light vehicle production and content per vehicle, with Magna also estimated to attain efficiency gains as volatility in production schedules moderates, bolstered by its own operational improvements. Accordingly, the Company’s leverage is estimated to progressively decrease as a function of both debt reduction and earnings growth, although DBRS Morningstar notes that cost and investment headwinds could hinder Magna’s efforts in fully reverting to its targeted leverage range by YE2024. This notwithstanding, the Company’s FRA remains fully commensurate with the assigned ratings as credit metrics persist readily within “A” levels. Additionally, Magna’s liquidity remains strong, as cash and available credit lines amounted to $6.3 billion as of March 31, 2023.

Consistent with the Stable trends on Magna’s ratings, DBRS Morningstar sees limited potential for positive rating actions over the near to medium term, taking into account the Company’s higher leverage and increased planned capital spending. Conversely, Magna’s consistent outperformance of its industry amid the Company’s still-conservative financial policy renders a downgrade somewhat unlikely, although weaker margins resulting in material negative free cash flow amid the Company’s higher leverage could result in negative rating implications.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Social Factors
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 profitability and reputation.

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 (May 17, 2022).

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

DBRS Morningstar applied the following principal methodology:
-- Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (October 14, 2022; https://www.dbrsmorningstar.com/research/404042)

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

A description of how DBRS Morningstar analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/397223/interplay-of-global-corporate-finance-rating-methodologies-when-analyzing-corporate-finance-transactions.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom, and by DBRS Ratings GmbH for use in the European Union, respectively. The following additional regulatory disclosures apply to endorsed ratings:

The last rating action on this transaction took place on June 30, 2022, when DBRS Morningstar confirmed the ratings on Magna International Inc. at A (low) with the trends remaining Stable.

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.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. For further information on DBRS Morningstar historical default rates published by the Financial Conduct Authority (FCA) in a central repository, see https://data.fca.org.uk/#/ceres/craStats.

Lead Analyst: Robert Streda, Senior Vice President, Diversified Industries
Rating Committee Chair: Timothy O’Brien, Managing Director, Global Head of Diversified Industries
Initial Rating Date: November 26, 1985

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].

Information regarding DBRS Morningstar ratings, including definitions, policies, and methodologies, is available on www.dbrsmorningstar.com or contact us at [email protected].

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