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Rating Action:

MOODY'S DOWNGRADES RATINGS OF DANA AND DANA CREDIT (CORPORATE FAMILY TO B1); OUTLOOK NEGATIVE

22 Dec 2005
MOODY'S DOWNGRADES RATINGS OF DANA AND DANA CREDIT (CORPORATE FAMILY TO B1); OUTLOOK NEGATIVE

Approximately $2.0 billon of credit obligations are affected

New York, December 22, 2005 -- Moody's Investors Service has lowered the ratings of Dana Corporation ("Dana") -- Corporate Family to B1 from Ba2; senior unsecured to B1 from Ba2; and Dana Credit Corporation (Dana Credit) which benefits from a support agreement provided by Dana -- senior unsecured B1 from Ba2. The Speculative Grade Liquidity rating was lowered to SGL-4 from SGL-3. The rating action concludes the ratings review initiated September 16,, 2005 and reflects the continued challenging environment for the company's auto components businesses and the prospects for continued weak financial metrics. The downgrades also incorporate the company's withdrawal of its guidance for 2005 full year earnings, announced deferred tax write-off, and the expected re-statement of its financial statements The outlook is negative.

The negative outlook reflects Moody's belief that the continuing challenging environment in the auto parts industry, including OEM price reduction requests, OEM production uncertainty, and high raw material costs, will continue to pressure Dana's credit metrics despite the company's announced restructuring plans. While the restructuring should help to stem recent losses and position the company for longer term competitiveness, financial metrics are unlikely to be supportive of a Ba rating for the foreseeable future. The restructuring will consume funds during the near term, but planned asset sales could mitigate some of the effect on Dana's liquidity. Nevertheless, a critical near term step necessary to support the company's liquidity profile and avoid further rating downgrades relates to its ability to conclude its internal accounting investigation and bring its financial reporting current.

Ratings downgraded are:

Dana Corporation

Corporate Family, to B1 from Ba2

Senior Unsecured Notes , to B1 from Ba2

Speculative Grade Liquidity to SGL-4, from SGL-3

Dana Credit Corporation

Senior Unsecured medium term notes supported by Dana, to B1 from Ba2

The downgrades reflect Moody's expectation that continuing market and competitive challenges will result in sustained weakness in Dana's credit metrics, cash generation and liquidity. The most serious operating challenges the company faces include uncertain OEM production schedules, ongoing pricing pressure from OEM customers, and higher raw material cost. At year-end 2004 Ford represented 25% of sales while GM represented 11%. Automotive sales, which are heavily weighted to the SUV and pick-up markets, represented about 73% of Dana's first-half sales. The balance of the company's business includes Dana's Commercial vehicle segment, which despite a more favorable business environment has underperformed peers. As a result, it is likely that Dana's free cash flow will remain negative for 2005. The company has established a restructuring plan designed to eliminate unprofitable business lines and reduce its cost structure which should, in conjunction with favorable new business awards, improve overall financial results. However, the plan can only be implemented over a period of time, and near term financial metrics are expected to remain inconsistent with the maintenance of a Ba rating.

As of June 30, 2005 (the last date for which Dana has provided financial information) LTM debt/EBITDA (using Moody's standard adjustments) was 5.6 times, and LTM EBIT/Interest expense was to 0.8 times. For the first half of 2005 Free Cash Flow (using Moody's standard adjustments) was negative $407 million. Total debt levels increased from the prior-year-end reflecting lower profits and seasonal working capital needs impacted by higher sales growth. However, at June 30, 2005 Dana maintained liquidity of $666 million in cash, $225 million of availability under its revolving bank facility, and $165 million of availability under its accounts receivable securitization program. However, most of the cash is offshore.

Dana is attempting to address its need for a lower cost structure through its announced restructuring which will close certain domestic facilities and consolidate certain production lines; divest its engine hard parts, fluid products, and pump products businesses; and reduce workforce levels and benefit programs. Dana expects savings from these programs of approximately $40 million to be realized in 2006 and to begin realizing an additional $20 million in the second half of 2007. The cash impact of the restructuring program is expected to total $27 million.

Dana continues to increase new business with announced net increases through 2007 of $1.3 billion. These awards will further diversify Dana's customer and geographic revenue base as approximately 70% of the net new business from 2005 to 2007 is outside the North America and approximately 80% is with customers other than the Big 3. In October 2005 Ford named Dana to its list of twelve strategic suppliers.

Beyond the operational challenges outlined above, Moody's believes that Dana also faces a critical near term challenge in completing its internal accounting investigation and bringing its financial reporting current. Absent accomplishing this in the near term, the company would need to obtain further waivers from lenders to avoid technical defaults under its financing agreements. Moody's believes that Dana's need to restate its financial statements for certain prior periods reflects lapses in internal controls over financial reporting which the company indicates it has actively investigated and is implementing procedures to correct. The ratings anticipate that the company will conclude the accounting review and bring its financial reporting current in the very near term. Any developments that result in further delays in releasing financial statements could adversely affect the rating. Dana's announcement that it will write-off deferred tax assets will not have a current cash impact. The balance of deferred tax assets June 30 2005 was approximately $740 million. However, the action does reflect the company's expectation of low levels of profitability in its U.S. operations over the coming years, which is incorporated in the rating downgrade.

Factors that could result in further pressure on the company's outlook or rating include failure to conclude the accounting review and release financial statements in a timely fashion; evidence that the restructuring cost savings are not being adequately realized; liquidity is not being adequately maintained; anticipated new business contracts are not materializing; announcements that the company is expecting to complete acquisitions; or increasing debt levels. Consideration for downward rating migration would arise if any combination of these factors or shortfalls in the execution of Dana's strategy were to result in leverage of over 6.0x and/or result in EBIT/Interest coverage below 1.5x.

Factors that could contribute to a stabilization of the rating outlook include evidence that Dana's restructuring and cost reductions efforts translate into significantly improved operating cash flow performance and credit metrics; further diversification of Dana's revenue base which results in stabilized or improved operating margins; and reductions in debt from announced asset sales. Consideration for a stabilized rating outlook or upward rating migration would arise if any combination of these factors were to reduce leverage materially under 4.0x or increase EBIT/interest coverage materially above 2.5x

The SGL-4 rating reflects uncertainty surrounding the timing of Dana filing of restated financial statements and the likelihood that Dana will need to source additional liquidity over the next twelve months to fund domestic cash needs. Cash flow from operations should improve with the completion of the company's restructuring program. However, this improvement involves execution risk and the uncertainty of production volumes in 2006. External liquidity under the company's $400 million revolving credit and $275 million accounts receivable securitization facility is developing as the company announced the extension of covenant waivers and ongoing discussions with its bank groups. Although covenant shortfalls that relate to the restatements have been waived, the company's financial covenants may need to be revisited if market conditions and operating trends contribute to any further weakness in financial performance.

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 had annual sales of approximately $9.1 billion in 2004 and employs 46,000 people in 28 countries.

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

New York
Timothy L. Harrod
Vice President - Senior Analyst
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

No Related Data.
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