DBRS Confirms ArvinMeritor at BB (low)

Dominion Bond Rating Service (DBRS) has today confirmed the ratings of ArvinMeritor’s (ARM or the Company) Senior Unsecured Notes and Convertible Senior Unsecured Notes at BB (low). The trends are Stable. The confirmation reflects the modest improvement in ARM’s financial profile, but takes into account the Company’s relatively high business risk profile.

DBRS notes that ARM continues to face challenging auto parts industry conditions, which have largely contributed to weak (albeit, modestly improved) margins at its light vehicle systems (LVS) business in fiscal 2006. Key headwinds include declining automotive volumes, high/rising raw material costs (namely steel) and pricing pressure from larger original equipment manufacturer (OEM) customers. The Company’s current restructuring plan is expected to improve LVS segment efficiency (e.g. layoffs, facility restructuring/divestment), but the near-term impact on profitability is likely to be modest. Earnings from ARM’s commercial vehicle systems (CVS) business have helped to mitigate the challenges facing the LVS segment, given strong medium/heavy truck demand. However, truck volumes are expected to measurably decline in calendar year 2007 and reduce demand for CVS products (given current pre-buying in advance of new U.S. and European emission regulations). A sharper-than-expected decline in CVS earnings, combined with continuing weak LVS profitability, would likely add pressure to the rating.

DBRS also notes that ARM’s financial risk profile is reasonable for the rating. The Company has consistently been profitable through a cycle, with a diversified revenue base that has moderated earnings volatility. ARM’s exposure to the North American Big Three (GM, Ford and DaimlerChrysler) is also comparatively modest, which limits exposure to the challenges faced by these customers (notably in the U.S.). ARM is expected to continue to fund capex and dividends over the near-term, which provides financial flexibility. The Company is also in the process of divesting its light vehicle aftermarket (LVA) businesses. The use of asset sale proceeds toward debt reduction contributed to the decline in debt-to-capital in fiscal 2006, and debt refinancing significantly improved ARMs maturity profile. Debt repayment from further modest asset sale proceeds is expected, but leverage is likely to remain aggressive for a cyclical company.

Notes:
All figures are in U.S. dollars unless otherwise noted.
This rating is based on public information.