DBRS Confirms BorgWarner at BBB (high)

Dominion Bond Rating Service (DBRS) has today confirmed the rating of BorgWarner Inc.’s (BWA or the Company) Senior Notes at BBB (high). The trend is Stable.

BWA has an above-average rating relative to its North American auto-parts industry competitors, mainly given its high value-added and technologically advanced products, its leading market positions and its diversified sales mix. In addition, the Company’s exposure to the North American Big Three automakers (General Motors Corporation, Ford Motor Company and DaimlerChrysler AG) in the United States is modest and declining (roughly 20% of expected fiscal 2006 sales), which limits the impact on BWA of production cuts, market share deterioration and other pressures being faced by these customers. These factors have contributed to strong profitability from the Company’s Engine and Drivetrain business segments, despite challenging auto-parts market conditions.

Over the medium term, BWA is expected to continue to generate favourable profitability, driven primarily by sales outside of North America. The global trend toward fuel economy, reduced emissions and improved engine performance are expected to be main drivers of demand for BWA’s products, including turbochargers, engine timing systems, dual-clutch transmissions and thermal management systems. The Company has expanded its share of business to automotive manufacturers in the Asia-Pacific region and in Europe (primarily as a result of its Beru AG (Beru) acquisition in 2005), and further penetration is expected.

DBRS notes that although the outlook is favourable, margins are not expected to improve measurably over the near term. Light-vehicle production is expected to remain relatively flat or modestly decline on a global basis. Furthermore, BWA is also exposed to high energy and raw-material costs (e.g., steel), which are showing few signs of easing. High energy prices have contributed to a decline in sport utility vehicle (SUV) and light-truck sales (especially in the United States) and are likely to constrain the Company’s product sales to these segments.

DBRS also notes that BWA’s financial risk profile is acceptable for the rating, with strong coverage ratios and leverage that has steadily declined to a reasonable level. The Company is expected to continue to generate free cash flow (before working capital), which provides financial flexibility. BWA used free cash flow to reduce debt associated with the Beru acquisition, which limited the impact on leverage. The Company remains acquisitive, and a large debt-financed acquisition could add pressure to the rating. However, BWA is expected to maintain a relatively conservative financial profile.

Note:
This rating is based on public information.