Morningstar DBRS Confirms Credit Ratings on Magna International Inc. at A (low), Stable

DBRS Limited (Morningstar 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.

KEY CREDIT RATING CONSIDERATIONS
The credit rating confirmations reflect Magna’s favourable 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. Morningstar DBRS also notes that Magna’s financial risk assessment (FRA) remains solid and fully commensurate with the existing ratings, notwithstanding the Company’s somewhat higher leverage (vis-à-vis historical norms), primarily reflecting Magna’s acquisition of the Veoneer Active Safety business (Veoneer) in 2023. Moreover, Morningstar DBRS notes that Magna remains committed to its historically conservative financial policy, with the Company aiming to revert to its targeted leverage range within 2025.

CREDIT RATING DRIVERS
Consistent with the Stable trend, Morningstar DBRS expects the Company’s credit ratings to remain constant over the near term. Magna is facing substantial costs and investment requirements associated with the progressive electrification of the automotive industry and ongoing advances in active vehicle safety. This high spending level, amid Magna’s increased leverage (albeit while remaining wholly consistent with the credit ratings) renders positive rating actions unlikely. Conversely, significantly weaker earnings amid these high investments—resulting in sizable negative free cash flow generation and thereby adversely affecting credit metrics—could have negative credit rating implications, although this is mitigated by the Company’s favourable FRA and conservative financial policy. Finally, in the event that Magna were to assume a markedly more aggressive financial policy, thereby resulting in a meaningful and sustained increase in leverage, this could also result in negative rating actions.

EARNINGS OUTLOOK
For 2024, Morningstar DBRS expects Magna’s earnings to moderately improve year-over-year (YOY). While aggregate industry vehicle production volumes are anticipated to remain roughly constant, Magna’s sales growth is forecast to outpace the industry (consistent with prior years). Moreover, while higher labour costs and reduced scrap rates represent headwinds to earnings, these are estimated to be more than offset by smoother production schedules across the industry, ongoing efficiency gains, and margin growth associated with new program launches. In aggregate, Morningstar DBRS projects Magna’s 2024 EBIT to range from $2.3 billion to $2.5 billion. Going forward, over the medium term, Morningstar DBRS expects Magna to undergo ongoing earnings growth and margin expansion in line with sustained increases in content per vehicle, attained operational efficiencies, and anticipated launches of new (typically higher margin) production programs.

FINANCIAL OUTLOOK
Morningstar DBRS anticipates Magna’s cash flow from operations in 2024 to remain solid, likely moderately increasing YOY as a function of higher estimated earnings. Capital expenditures (capex) are projected by the Company to remain substantial and range from $2.4 billion to $2.5 billion. Dividends are anticipated to continue growing in a moderate and controlled manner, with Morningstar DBRS estimating aggregate payments in 2024 to slightly exceed $620 million. Notwithstanding the sizable capex and ongoing dividend increases, Morningstar DBRS projects Magna’s free cash flow in 2024 to be positive, with this persisting over the medium term in line with ongoing earnings growth.

Morningstar DBRS acknowledges that the Company’s current leverage is somewhat higher relative to historical norms; this is substantially a function of the Veoneer acquisition in 2023. While Magna has slightly delayed in reverting to its targeted leverage ratio (outlined by the Company as adjusted debt-to-adjusted EBITDA being in the range of 1.0 times (x) to 1.5x), this is more than explained by high capex and investments, delays in the ramp up of certain production programs (notably in electric vehicles (EVs)) and unfavourable seasonality/timing effects. Despite this, the Company’s FRA remains fully commensurate with the assigned ratings as credit metrics persist readily within “A” levels, with Morningstar DBRS expecting Magna to revert to its targeted leverage.

CREDIT RATING RATIONALE
Magna’s credit ratings are supported by its solid position as a major global Tier 1 automotive supplier. The Company is among the most diversified of automotive suppliers, with Magna’s high technology providing solid pricing power vis-à-vis its original equipment manufacturer (OEM) customers. Moreover, Magna is well positioned with respect to future automotive trends, with the significant majority of its product portfolio being either powertrain agnostic (i.e., internal combustion engine vehicles versus EVs) or standing to benefit from the progressive electrification of the industry. Finally, Magna maintains a quite conservative financial policy, with the Company having the financial strength to capitalize on increased growth opportunities, particularly as consolidation continues and OEMs look to suppliers with global production capabilities.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Social (S) Factors
Morningstar DBRS considered that the S 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, is subject to warranty, product liability, and recall costs that could potentially materially adversely affect the Company’s profitability and reputation. To this end, Magna is experiencing increased customer pressure to assume greater warranty responsibility. Although the social factor could have some negative credit impact, Morningstar DBRS estimates such to be suitably absorbed by Magna’s strong financial profile and therefore does not result in any change in the credit ratings or trends assigned to Magna.

There were no Environmental or Governance factors that had a relevant or significant effect on the credit analysis.

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024), https://dbrs.morningstar.com/research/427030

BUSINESS RISK ASSESSMENT (BRA) AND FINANCIAL RISK ASSESSMENT (FRA)
(A) Weighting of BRA Factors
In the analysis of Magna, the relative weighting of the BRA factors was approximately equal.

(B) Weighting of FRA Factors
In the analysis of Magna, the relative weighting of the FRA factors was approximately equal.

(C) Weighting of the BRA and the FRA
In the analysis of Magna, the BRA carries greater weight than the FRA.

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

Morningstar DBRS applied the following principal methodology:

Global Methodology for Rating Companies in the Automotive Manufacturing and Supplier Industries (April 15, 2024),
https://dbrs.morningstar.com/research/431161

Morningstar DBRS credit ratings may use one or more sections of the Morningstar DBRS Global Corporate Criteria (April 15, 2024, https://dbrs.morningstar.com/research/431186), which covers, for example, topics such as holding companies and parent/subsidiary relationships, guarantees, recovery, and common adjustments to financial ratios.

The following methodologies have also been applied:

Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024)
https://dbrs.morningstar.com/research/427030

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

A description of how Morningstar DBRS analyzes corporate finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/431153.

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@dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

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

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

This credit 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 credit ratings:

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

For further information on Morningstar DBRS historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see: https://registers.esma.europa.eu/cerep-publication. For further information on Morningstar DBRS 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
Rating Committee Chair: Anke Rindermann, Managing Director
Initial Rating Date: November 26, 1985

Information regarding Morningstar DBRS ratings, including definitions, policies, and methodologies, is available on dbrs.morningstar.com or contact us at info@dbrsmorningstar.com.

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