DBRS Rates ArvinMeritor’s $175 million Convertible Senior Unsecured Notes New Issue at BB (low)

DBRS has today assigned a rating of BB (low) to the $175 million Convertible Senior Unsecured Notes (due 2027) of ArvinMeritor Inc. (ARM or the Company); the trend is Stable. ARM is expected to use proceeds from the issuance to repay outstanding indebtedness under its Term Loan B, with no impact on net leverage. In conjunction with the new issue, DBRS is confirming the ratings of the Company’s existing Convertible Senior Unsecured Notes and Senior Unsecured Notes at BB (low), with Stable trends, respectively.

ARM’s financial and business risk profile has modestly increased over the past year, but remains within the range of acceptability for the current rating. The Company continues to face challenging light vehicle market conditions, notably from declining OEM production in North America, pricing pressure, and higher-than-expected raw material costs (i.e. steel). These factors have largely contributed to weak margins in its light vehicle systems (LVS) segment, and are not expected to ease over the near-term. In addition, the Company’s commercial vehicle systems (CVS) segment margins have also weakened despite strong industry demand, largely related to increased costs.

The Company’s exposure to the significant expected decline in commercial vehicle demand in 2007 (largely from new emission regulations) has increased following the sale of its Emissions Technology (ET) business for $310 million. The CVS segment will account for roughly 67% of total sales (from 47%) upon closing of the transaction, which is expected in fiscal Q3 2007. DBRS views the sale of its ET business as generally neutral to the credit profile of ARM; the increase in liquidity and removal of a lower-margin business is largely offset by the loss of ET earnings and cash flow, and the Company’s heightened earnings sensitivity to the looming industry slowdown.

Over the near-term, sharper-than-expected declines in commercial vehicle volumes, particularly in the event of slowing economic conditions, further production cuts by light vehicle OEMs, and rising raw material costs are key risks to ARM’s profitability. The Company is highly dependent on efficiency gains, largely related to its restructuring initiatives, to moderate the impact of the above noted challenges on earnings. In absence of sufficient cost savings, the lower-than-expected earnings and cash flow will weaken leverage and coverage ratios and likely have negative implications for the rating.

The confirmation of ARM’s rating reflects the Company’s well diversified customer mix, including modest relative exposure to the North American Big 3, the expectation for near-term free cash flow generation, good liquidity position, and favourable debt repayment schedule.

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