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Rating Action:

MOODY'S CONFIRMS FUNDAMENTAL DEBT RATINGS FOR DANA & DCC; UPGRADES LIQUIDITY RATING TO SGL-2; OUTLOOK POSITIVE

24 Dec 2003
MOODY'S CONFIRMS FUNDAMENTAL DEBT RATINGS FOR DANA & DCC; UPGRADES LIQUIDITY RATING TO SGL-2; OUTLOOK POSITIVE

Approximately $2.9 Billion of Dana and DCC Debt Obligations Affected

New York, December 24, 2003 -- Moody's Investors Service confirmed the fundamental debt ratings for Dana Corporation ("Dana") and Dana Credit Corporation ("DCC"). The ratings confirmations factored in ArvinMeritor, Inc.'s ("ARM") termination of its hostile tender offer for the company, together with Dana's steady progress with regard to enhancing its operating performance and credit protection measures.

Moody's upgraded Dana's speculative grade liquidity rating to SGL-2, from SGL-3, in recognition of the company's approximately $700 million of unused credit commitments, cash balance in excess of ongoing operational needs, and completion of its restructuring program and associated implementation costs during 2003. Dana has already closed 35 facilities and is on track to generate at least $180 million in total fixed cost savings during 2004 directly as a result of the restructuring program.

Moody's additionally reinstated the positive rating outlook for Dana, recognizing the potential for further improvement in the company's cash flow performance and credit protection measures.

The following specific ratings actions were taken:

- 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 $2.2 billion of senior

unsecured notes with various rates and maturities;

- Confirmation of the Ba3 ratings of DCC's 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;

- Upgrade of Dana's speculative grade liquidity rating to SGL-2, from SGL-3

Moody's rating evaluation considered Dana's credit protection measures on a consolidated basis with DCC, since DCC is supported by an operating agreement with Dana.

The ratings continue to reflect Dana's weak consolidated credit protection measures relative to its peers, including high leverage, moderate interest coverage, and a low return on total assets. Meaningful and sustainable improvement still needs to be achieved through realization of the anticipated benefits from the restructuring program that is nearing completion, in combination with the addition of more value-added contracts, divestiture of poorly performing and non-core assets, and increased productivity. Dana must remain highly focused on new business generation with a broader base of customers, as the company's revenue growth has notably lagged the industry over the past couple of years. In order to drive organic growth in terms of both sales and margins, and simultaneously maintain a competitive advantage which drives incremental new business awards from a broader base of both Big 3 and transplant/foreign vehicle programs, Dana must emphasize investment in technology-driven product development. The long three-to-five-year lead times associated with new OEM programs makes near-term progress on these fronts highly critical.

In the event that cash flow generation and shareholder value do not improve in accordance with management guidance, the company may face greater challenges with regard to producing adequate returns and shareholder value. While Dana is taking various strategic measures to enhance its stock price, including increasing the dividend to $.06/share or $7.5 million each quarter (up from $.01/share), it is essential that the company demonstrate that its core business operations are being effectively managed by the company's management team. The ARM tender offer was costly to Dana both in terms of dollars spent and time invested by senior management to defend the company. Dana is currently operating with an acting chief executive officer, following the untimely passing of its former CEO during September 2003. Now that the ARM tender offer has been withdrawn, Dana is in an improved position to finalize its search for a new chief executive officer and renew its focus on strengthening the company.

The ratings and positive outlook more favorably reflect that Dana stands to realize the full $180 million in annualized benefits from its restructuring program in 2004, while having completed substantially all of the approximately $445 million cash payments associated with restructuring and consolidation activities during 2002 and 2003. Management believes that Dana's operations are now effectively "right-sized" for the future. Several marginal businesses were also recently divested by Dana, including the engine management business (which sold for $90 million cash plus notes) and the Thailand business (which sold for $50 million cash). The assets sales should be accretive to Dana's ongoing credit protection measures, since neither of these businesses had been cash flow contributors. Net proceeds from the asset sales were utilized by Dana to repurchase a like amount of the company's senior unsecured notes, including (i) $19 million of the notes maturing March 2004, (ii) $32 million of the notes maturing 2028, and (iii) $107 million of the notes maturing 2029.

During early December 2003 Dana furthermore announced that it has hired Credit Suisse First Boston and Goldman Sachs & Co. to assist with the divestiture of the company's Automotive Aftermarket Group ("AAG") during the first half of 2004. AAG accounted for approximately 22.5% of Dana's total existing revenue base during 2003. Net proceeds from the sale would be utilized by Dana to reduce debt and pension obligations, in an effort to restore the company's credit metrics. Dana has indicated that AAG has limited carryover to the rest of the company's business lines, and that Dana's intention is to become fully focused on the expansion of its original equipment operations.

Dana's up-front investments over the past two years in a series of significant program launches are also starting to pay off. Production of each of these programs for Ford, GM, Toyota, Nissan, BMW and others are scheduled to initiate during the latter half of 2003 through 2004. To date there do not appear to be any severe launch inefficiencies which stand to negatively affect Dana's estimated investment returns or customer satisfaction. During 2003 Dana was awarded approximately $1.15 billion of annualized incremental new business contracts, which are expected to roll out during 2003 through 2007. Dana is well-positioned to benefit from the long-awaited recovery of the heavy duty truck and trailer markets, which typically generate strong margins when volumes reach normalized levels. Heavy duty sales, orders, and backlog rates have been steadily improving. Dana has indicated that it will step up the focus on technology and innovation, in order to protect the ability to continue generating new business, increase content per vehicle, and defend the company against severe customer price compression.

The upgrade of the speculative grade liquidity rating to SGL-2, from SGL-3, reflects Dana's prospects for improved operating cash flow performance, now that expenditures for its large-scale restructuring program are nearly complete and the anticipated annualized cost saving can be fully realized. Dana's cash flow should also benefit over the course of 2004 from the new business launches scheduled to come on line. Dana currently maintains $300 million of unused availability under its $400 million accounts receivable securitization. While Dana is incentivized not to utilize more than $50 million of its $400 million revolving credit facility (and to date has left the facility completely undrawn) in order to avoid triggering the springing collateral lien, the availability remains intact for use in the unforeseen event that the company's cash flow position becomes compromised. As of September 30, 2003 Dana had a cash balance of $550 million, which management has indicated would grow by year end. However, Moody's notes that approximately $400 million of this cash balance is not readily available to reduce debt or fund operations due to the existence of cash collateral requirements for existing letters of credit and surety bonds, the need for a base level of cash to operate the business on a global basis, or the fact that some of the cash at foreign operations cannot be readily repatriated to the US without incurring tax penalties. Dana will additionally need to repay the remaining $231 million of senior unsecured notes maturing on March 1, 2004.

DCC faces approximately $199 million of debt maturities during 2004, which management is confident can be serviced through additional asset sales. Management has additionally indicated that DCC will likely upstream up to a $50 million dividend to Dana, which would further enhance Dana's liquidity. However, in Moody's opinion, maintenance of adequate liquidity at the DCC level is also an important credit consideration. DCC's need to execute timely asset sales at sufficient values to meet debt maturities will pose an ongoing challenge for management. Under a worst case scenario, if asset sales were not completed on a timely basis, Dana would then be called upon to downstream cash back to DCC under the operating agreement in effect. While this circumstance has never occurred during the life of DCC, the company is confident that the provisions of the operating agreement would work as originally intended.

Potential favorable future rating events could include completion of Dana's intended sale of the AAG business for $1 billion of more of gross proceeds, steady improvement in cash flow from operations and corresponding debt reduction, and continued new business wins from a broadened customer base for value-added technology-oriented content.

Potential negative future rating events could include an inability to improve the pace of new business generation, lost market share, problematic program launches damaging both the company's cash flow performance and customer satisfaction level, a failure to reduce the cost base and improve margins as expected, or initiation an unanticipated re-leveraging transaction.

On a consolidated GAAP reporting basis for the last twelve months ended September 30, 2003, Dana reported total debt/ EBITDA leverage approximating 4.1x and 4.4x, respectively, before and after including adjustments for pensions and the present value of operating leases. Consolidated net debt/EBITDA was 3.3x, including only on-balance sheet debt obligations. LTM EBIT coverage of interest was only fair at about 1.6x, while the EBIT return on assets was weak at about 4.0%. EBIT and EBITDA in these calculations were adjusted to add back roughly $80 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 3.5x and 3.9x before and after including adjustments for pensions and the present value of operating leases, respectively.

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. Dana's annual revenues approximate $9.6 billion.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Lisa B. Matalon
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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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