DBRS Rates BorgWarner Inc. at BBB (high)p

Dominion Bond Rating Service (“DBRS”) has today assigned a rating of BBB (high)p to the Senior Notes of BorgWarner Inc. (“BWA” or the “Company”). The trend is Stable.

DBRS attributes BWA’s rating to its above-average business profile, with a specialized and highly value-added and technologically advanced product portfolio. In addition, BWA has products serving some of the fastest growing applications within the auto parts industry, including products aimed at improving vehicle fuel efficiency, reducing emissions, and enhancing vehicle performance and stability. Also factored into the rating are the Company’s favourable credit profile, its ability to generate healthy cash flow from operations at all points in the automotive cycle, with EBIT stable in the US$200 million-$300 million range, its highly diversified customer and geographic base, and its good vehicle model exposure.

Despite an uncertain and competitive industry environment, a flat vehicle production outlook, and rising price pressures from original equipment manufacturers (OEMs) impacting all Tier 1 suppliers, BWA has uniquely insulated itself from a majority of these pressures and consistently generates strong profits and cash flow. DBRS notes that BWA is offsetting the near-term impact from increased raw material prices and price reductions to OEMs through continuous productivity improvements and the value-added content of its product portfolio. The profitability outlook remains favourable as the Company executes on a strong backlog of new business in both its engine and drivetrain group and as tightening emission standards worldwide are expected to lead to increased demand for diesel engine light vehicles in the coming years. The backlog of net new business is estimated at US$1.4 billion for the 2005-2007 period, with 75% of the backlog from the non-big three North American automakers. The recent acquisition of Beru AG has expanded the Company’s engine technology in the diesel market and strengthened its electronic controls business and sensor expertise.

BWA maintains a conservative financial profile with an above-average credit profile. Historically, cash flow from operations has been more than sufficient to finance an intensive capex and tooling program and fund dividend payments. Since 1999, free cash flow (US$150 million per annum for the past three years) has been used for debt reduction and has led to a significant improvement in the Company’s leverage. The completion of the acquisition of Beru AG in Q1 2005 has increased debt levels and marginally weakened credit statistics. The Company financed the acquisition with a mix of debt and available cash balances.

DBRS expects BWA’s credit profile to strengthen during 2005 with gross debt levels to approximate the mid-30% level or lower. The Company should have no problems either refinancing or using available cash balances to retire the US$139 million of senior notes maturing in 2006. The Company has been consistently profitable, with return on equity generally over 14% through most cycles.

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