DBRS Rates ArvinMeritor Inc. at BBp

Dominion Bond Rating Service (“DBRS”) has today assigned a rating of BBp to the Senior Unsecured Notes of ArvinMeritor Inc. (“ARM” or the “Company”). The trend is Stable.

The rating reflects the Company’s weak profitability despite its leadership positions in key product areas and a highly leveraged balance sheet as a result of past acquisitions. DBRS notes that ARM is burdened by a high fixed-cost structure. The Company’s Light Vehicle Systems (LVS) segment’s operating margins have been in steady decline, as the segment’s focus is on the production and/or assembly of commodity-oriented auto part components. The extremely competitive industry environment within the LVS segment and the ongoing price reductions demanded by original equipment manufacturers (OEMs) have placed a greater emphasis on the cost-competitiveness of auto parts suppliers. As a result, the decline in ARM’s profitability in light of industry conditions has been exacerbated by the Company’s high fixed-cost structure and the nature of the components supplied. The Company’s diversified product capabilities is partially offsetting some of the weakness in LVS, with the commercial vehicle segment benefiting from robust market conditions.

DBRS expects the Company’s profitability going forward to stabilize, supported by the continuing healthy market conditions in the commercial vehicle segment and continuing growth in the application of ARM’s emissions technology. Despite ongoing restructuring initiatives within the LVS segment aimed at reducing the cost structure, an improvement in margins has been delayed as industry conditions remain challenging and elevated raw material costs (steel prices) continue to negatively impact the segment. Longer term, the extensive restructuring initiatives within the LVS segment should provide for an improvement in profitability. Annual cost savings are estimated at US$50 million to US$60 million. ARM’s credit profile remains under pressure, with leverage at elevated levels for a Company operating in a highly cyclical industry and negative net free cash flow forecast (excluding asset sales proceeds) for fiscal 2005. ARM is in the process of disposing of additional non-core assets and DBRS expects the proceeds will be utilized to reduce leverage and improve the Company’s financial flexibility.

Although still at low levels, cash flow from operations will remain sufficient to fund capex and dividends. However, the Company’s financial flexibility will be constrained in the near term as a result of the cash restructuring charges pertaining to the LVS initiatives, pension and retiree contributions (which remain a significant use of cash), and negative working capital requirements. ARM’s liquidity situation is adequate, with available cash balances of US$99 million and access to both accounts receivable securitization facilities and a US$900 million credit facility. Furthermore, debt maturities are limited in 2005-2006, providing ARM with additional flexibility in executing its restructuring plans. In the near term, debt protection measures will remain weak. However, DBRS believes the expected proceeds from the divestiture should provide the basis for strengthening of the balance sheet.

Note:
p - This rating is based on public information.