DBRS Confirms BorgWarner at BBB (high)

DBRS has today confirmed the senior unsecured debt rating of BorgWarner Inc. (BWA or the Company) at BBB (high), following stable financial performance over the past year despite challenging automotive parts industry conditions in the United States. In addition, the Company’s business risk profile remains more favourable than the auto parts industry average, largely due to its well-diversified sales and specialized product mix.

Growing demand for BWA’s engine products (namely turbochargers) in Europe and Asia was the key driver of the modest improvement in earnings over the 12 months to June 30, 2007. The Company’s diversified mix of sales has reduced its exposure to the near-term softness in U.S. automotive industry conditions. Over 60% of estimated 2007 revenue (and 73% of new business from 2007-2009) is expected from Europe and Asia, where the Company has captured an increased share of non–Big Three (GM, Ford, Chrysler) business. In addition, BWA’s strong market positions in its core engine and drivetrain products help to mitigate pricing pressure, mainly from original equipment manufacturers, relative to producers of more commoditized products. These factors have contributed to BWA’s solid financial profile, which includes consistent free cash flow and conservative leverage (debt-to-capital of 27% at June 30, 2007).

Over the near term, key drivers of modest earnings growth include favourable demand for its Engine group products, supported by rising vehicle production/increased customer penetration in Asia and Europe. The trend toward tightening emission regulations and improved fuel economy are key positive industry trends that are expected to support BWA earnings over the medium to longer term.

DBRS notes that BWA’s credit metrics are strong for the rating. However, the Company continues to face several challenges, namely its exposure to cyclical automotive industry conditions (light vehicle market accounts for roughly 75% of sales). Margins have modestly but steadily declined over the past several years, and are expected to continue to be constrained by high energy and raw material costs over the near term. In addition, while BWA’s sales to the U.S Big Three in North America are proportionally well below most of its industry peers, it remains meaningful at roughly 17% of sales. Big Three market share losses are expected to continue over the near term, and a prolonged work stoppage in the United States (e.g., United Autoworkers strike) would negatively impact the Company’s financial profile (but the probability of a strike is much diminished). Furthermore, the Company is acquisitive and is expected to use debt to finance further acquisitions. As such, leverage is likely to increase, with BWA targeting a debt-to-capital ratio of 30% to 40%. However, the Company’s balance sheet is expected to remain acceptable for the rating.