Investing.com -- Moody’s Ratings has confirmed the A3 ratings of Magna International Inc (TSX: MG )., a global automotive supplier, but revised the company’s outlook from stable to negative. The ratings affirmed include Magna’s A3 LT Issuer Rating, (P)A3 Senior Unsecured Shelf rating, A3 Senior Unsecured Notes ratings, P-2 Commercial Paper rating, and Magna International (NYSE: MGA ) Investments S.A.’s P-2 backed Commercial Paper rating.
The negative outlook comes in the wake of a persistently challenging and progressively volatile automotive market. Factors such as sluggish car production, escalating trade tensions, and the potential for increased costs and supply chain disruptions are contributing to the negative outlook. Given these conditions, it may be hard for Magna to achieve its leverage reduction target of 1.5x or lower.
Magna’s debt to EBITDA ratio increased to approximately 2.5x following its acquisition of the Veoneer (NYSE: VNE ) Active Safety business from SSW Partners for $1.5 billion in June 2023. Despite the company’s goal to reduce financial leverage to 1.5x by 2024, Moody’s anticipates it won’t reach this target until the end of 2026 due to weaker-than-expected market conditions and the temporary halt of share repurchases in 2024.
At the end of 2024, Magna’s adjusted debt/EBITDA was 1.7x, and Moody’s expects it to remain above the 1.5x trigger for the current rating throughout 2025. However, Moody’s believes the company will reach this target by the end of 2026, thanks to its efforts to control costs, improve operational efficiencies, negotiate commercial recoveries, and use free cash flow to repay debt.
Magna’s rating benefits from its strong market position as a leading global auto parts supplier, its conservative financial policy, strong liquidity, ability to generate free cash flow, and extensive capabilities in various automotive systems. However, the rating is limited by geographic concentration risk, dependency on major North American and German manufacturers, policy uncertainties, technology risks from increasing innovation, and elevated leverage following the 2023 acquisition.
Magna exhibits strong liquidity, with approximately $4.2 billion of sources against about $1.2 billion in uses through June 2026. The company also has both European and US commercial paper programs for up to Euro 1 billion (issued by Magna International Investments S.A.) and $2 billion respectively, supported by Magna’s global credit facility.
The negative outlook indicates the potential impact that the increasingly volatile automotive market could have on Magna’s operating performance and credit metrics, potentially hindering its ability to reduce leverage.
Magna’s ratings could be upgraded if the company improves its EBIT margin above 10% and maintains conservative leverage and financial policies. The ratings could be downgraded if it becomes unlikely that Magna will be able to restore its credit metrics or if global vehicle production levels decline sharply without offsetting restructuring actions by Magna.
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