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01 Jul 2003
MOODY'S ASSIGNS SGL-3 LIQUIDITY RATING FOR DANA CORP; CONFIRMS Ba3 SR. IMPLIED RATING; IMPROVES DANA AND DANA CREDIT RATING OUTLOOKS TO POSITIVE
Approximately $3.1 Billion Of Debt Obligations Affected
New York, July 01, 2003 -- Moody's Investors Service assigned an SGL-3 speculative grade
liquidity rating for Dana Corporation ("Dana"). This
was a first-time SGL rating assignment for the company.
Moody's additionally confirmed Dana's Ba3 senior implied rating,
as well as all other existing ratings for Dana and Dana Credit Corporation
Moody's furthermore improved the rating outlooks for both Dana and
DCC to positive, from stable, in recognition of reduced absolute
debt levels achieved through improved operating performance and asset
divestitures, together with expectations for more meaningful improvement
in Dana's credit protection measures over the next 18-to-24
The following specific rating actions were taken:
- Assignment of an SGL-3 speculative grade liquidity rating
- Confirmation of the Ba3 rating for Dana's $400 million
senior unsecured revolving
credit facility due November 2005;
- Confirmation of the Ba3 ratings of Dana's approximately
$2.35 billion of senior
unsecured notes with various rates and maturities;
- Confirmation of the Ba3 ratings of DCC's approximately
$330 million of remaining
medium term notes with various rates and maturities supported by Dana;
- Confirmation of the Ba3 senior implied rating for Dana;
- Confirmation of the Ba3 senior unsecured issuer rating for Dana;
The assignment of an SGL-3 speculative grade liquidity rating reflects
Moody's opinion that Dana's liquidity is adequate over the next twelve
months, relative to the company's roughly $9.8
billion revenue base and approximately $2.5 billion existing
debt load (excluding any recourse obligations of DCC). Effective
availability under the company's $400 million revolving credit
facility and $400 million accounts receivable securitization is
currently constricted in the aggregate to about $500 million,
once financial covenant restrictions (incorporating net debt levels) are
considered. Effective unused quarter end availability at March
31, 2003 was below $500 million, since a portion of
Dana's accounts receivable securitization has been drawn due to
seasonal working capital needs during the first and second quarters.
The required covenant levels are also scheduled to step up at December
31, 2003, and then again in 2004. In addition,
Dana maintains that the $400 million bank revolving credit facility
is in place for back-up purposes only. The company agreed
to establish a springing lien as part of the February 6, 2003 credit
agreement amendment. The springing lien, which would require
the pledge of certain collateral to the lenders (subject to restrictions
within the company's notes indentures), would be triggered
in the event that revolving credit usage exceeds $50 million for
more than five consecutive days and would not terminate until Dana once
again achieves investment grade long-term credit ratings of Baa3/BBB-
with stable outlooks. While Dana has in excess of $500 million
of cash reflected on its balance sheet, almost $350 million
of this amount is tied up either as collateral for certain standby letters
of credit or must be accessible for global operational needs. The
company is subject to scheduled principal debt maturities which are nominal
during 2003, but $276 million in 2004. Management
expects to satisfy these obligations through existing cash, committed
availability, and internally generated cash flows. Operating
cash flow should improve between now and mid-2004, as cash
required for restructuring and new launches wanes and the company then
benefits from lower fixed cost break-even levels and revenues from
new value-added programs. In the event that Dana's cash
availability proves to be insufficient to address the upcoming maturities
due to performance shortfalls, seasonal working capital build-ups,
the timing of capital expenditures for new programs, or other factors,
Dana could potentially pursue additional asset divestitures or an incremental
notes offering. While there is no certainty that Dana would be
able to execute such transactions if needed, the company has been
successful completing several similar transactions over the past couple
of years. Proceeds from recent divestitures will reduce net debt,
but the exact application of funds is still under management consideration.
The confirmation of Dana's Ba3 senior implied rating and all of
Dana's and DCC's other existing debt ratings reflects that
the companies' credit protection measures remain consistent with
the current ratings and have not manifested material improvement to date.
While Dana achieved approximately $550 million in gross debt reduction
over the past year and has already realized $130 million of the
approximately $180 million of anticipated run rate restructuring
savings, the company has had to absorb heavy launch costs for seven
structures platforms slated to be launched during late 2003 and 2004,
along with increased pension and healthcare costs. Moody's
notes that Dana will expend about $125 million in cash connected
with these restructuring efforts in 2003, and will make a total
of $120 million in residual cash payments during 2004 through 2007.
These cash payments will be applied against the approximately $445
million of reserves associated with the restructuring that were expensed
during 2001 and 2002. Dana notably divested certain non-core
assets which had previously generated positive cash flows for the company.
The application of the net proceeds from these sales therefore did not
materially reduce total debt/EBITDA leverage, nor improve Dana's
return on assets. Dana's revenue growth furthermore lagged
the industry over the past couple of years due to a combination of the
impact of divestitures, the sharp downturn in the commercial truck
and off-highway markets, slowing aftermarket demand as the
industry's base of retailers continues to consolidate and reduce
aggregate inventory levels, and the company's greater exposure
to Ford and DaimlerChrysler platforms than to the better-performing
General Motors platforms. Dana's shareholders equity suffered
$540 million of charges during 2002, attributable to goodwill
impairment ($220 million), pension liability adjustments
($220 million) and deferred translation losses ($100 million).
Dana continues to risk exposure to asbestos lawsuits, but believes
that it is well protected by remaining insurance coverage based upon favorable
historical claims and out-of-pocket payment experience.
The changes in the rating outlooks for Dana and DCC to positive,
from stable, reflect Dana's conversion to a longer-term
capital structure with a considerably improved debt amortization profile,
together with Moody's expectations that the company's credit
protection measures will demonstrate meaningful improvement over the next
18-to-24 months. Dana stands to benefit as the new
structures programs begin to roll out and their associated launch costs
dissipate over the next several quarters. The company is also approaching
full realization of the anticipated $180 million run rate for restructuring
cost improvements, which have lowered the break-even production
levels for this cyclical business going forward. Dana recently
closed on the sale of a small start-up operation in Thailand,
for which it received approximately $50 million in proceeds at
closing. Dana has also just executed the sale of its unprofitable
engine management operations to a strategic acquirer for $90 million
in closing proceeds, plus $15 million in seller notes and
$15 million in equity of the acquirer. Dana's asset
sales have occurred at a faster pace than originally projected.
While automotive production is expected to decline during the latter half
of 2003, current market indicators signal that demand within the
highly cyclical commercial and off-highway segments is steadily
strengthening. The company continues to book incremental net new
business awards with an expanding customer base that includes transplants
Toyota, Nissan, BMW and Volkswagen. Dana's approximately
$5 billion current projected book of net new business will roll
out during 2003 through 2007. Dana's ability to support DCC
under the terms of the operating agreement is thereby strengthened,
in the unlikely event that it is necessary for Dana to provide such support.
DCC's management is confident that the finance company will continue
to be self-supporting with its own cash flows from remaining business
activities and the proceeds from DCC asset sales, until the entity
is fully divested and/or liquidated.
Future events that could cause Moody's to consider rating upgrades
for Dana and DCC Credit include satisfaction on the part of the rating
agency that the company's consolidated credit protection measures
have improved sufficiently on a sustainable basis over the near-to-intermediate
term. Moody's future rating evaluations would encompass various
factors including Dana's ongoing liquidity position; the company's
ability to either satisfy prospective bank covenant requirements or obtain
the necessary amendments; the company's success with regard
to additional absolute dollar debt reduction, and evidence that
Dana is maintaining and growing its relative competitive position and
diversity of revenues.
Future events that could cause Moody's to lower the ratings or outlook
for Dana and DCC include a decline in effective liquidity that is not
generated by typical seasonal working capital needs; a shortfall
in restructuring savings versus plan; an announcement that material
new restructuring reserves will be required; the failure of new programs
to be launched on time, or of reimbursable tooling to be recovered
as anticipated; a requirement that Dana make material cash infusions
into its pension plans; or indications that Dana has become liable
on its own account for major settlements or judgments associated with
asbestos litigation. Moody's would also be concerned in the
event that Dana were to make substantial cash investments in either new
joint ventures or acquisitions, or should DCC fail to generate asset
sales sufficient to satisfy its own upcoming scheduled principal maturities
of roughly $90 million in 2003 and $199 million in 2004.
On a consolidated GAAP reporting basis for the last twelve months ended
March 31, 2003, Dana reported total debt/ EBITDA leverage
approximating 3.9x and 4.4x, respectively, before
and after including adjustments for pensions and the present value of
operating leases. Consolidated net debt/EBITDA was 3.2x,
including only on-balance sheet debt obligations. LTM EBIT
coverage of interest was reasonably good at about 1.85x,
while the EBIT return on assets was weak at about 4.8%.
EBIT and EBITDA in these calculations were adjusted to add back roughly
$191 million of restructuring and other non-recurring charges
taken during the LTM period.
Accounting for DCC on an equity basis, Dana's total debt/EBITDA
leverage was approximately 2.9x and 3.7x before and after
including adjustments for pensions and the present value of operating
Moody's does not rate the $400 million on-balance
sheet accounts receivable securitization program that Dana established
during March 2001. Neither does Moody's rate DCC's
approximately $200 million remaining revolving credit facility
commitment, nor certain other recourse obligations of the finance
company for which Dana provides support via a formal operating agreement
between Dana and DCC.
Dana Corporation, headquartered in Toledo, OH, is a
global leader in the engineering, manufacture and distribution of
products and services for the automotive, engine, heavy truck,
off-highway, industrial and leasing markets. Dana
Credit Corporation is a wholly owned leasing and finance subsidiary of
Dana Corporation which is in the process of being liquidated.
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Lisa B. Matalon
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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