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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,
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
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 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
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
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
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.
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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