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07 Dec 2004
MOODY'S UPGRADES ALL EXISTING DEBT RATINGS FOR DANA & DANA CREDIT (SENIOR IMPLIED TO Ba2); CONFIRMS SGL-2 LIQUIDITY RATING; ASSIGNS Ba2 RATING TO PROPOSED SR. UNSEC. NOTES
Approximately $2.3 Billion of Dana and Dana Credit Debt Obligations Affected
New York, December 07, 2004 -- Moody's Investors Service upgraded all existing long-term ratings
for Dana Corporation ("Dana") and Dana Credit Corporation ("DCC"),
and confirmed the company's SGL-2 speculative grade liquidity rating.
The rating upgrades incorporate Moody's belief that Dana is increasingly
focused on the generation of organic growth of core operations and realization
of sustainable improvements in operating fundamentals. The rating
actions also factor in the material reduction in total debt which Dana
will realize through the application of net proceeds from sale of its
Automotive Aftermarket Group ("AAG") to The Cypress Group ("Cypress")
which was completed on November 30, 2004. Total consideration
received for AAG approximated $950 million in cash, plus
a seller note valued at $50 million upon closing. Of this
amount, Dana will contribute approximately $200 million to
its under-funded pension plan and will apply approximately $635
million to repay existing high yield notes which have been tendered in
accordance with the company's tender offer in progress and cover associated
premiums and transaction fees and expenses.
Moody's additionally assigned a Ba2 rating to Dana's $450 million
of proposed senior unsecured notes due 2015. The new notes will
primarily be utilized to refinance the balance of the company's notes
which have been tendered at a premium.
The rating actions conclude the review for possible upgrade that was initiated
on July 9, 2004 upon Dana's announcement that it had signed a definitive
agreement to sell AAG. The rating outlook is now stable.
The following specific rating actions were taken:
- Upgrade to Ba2, from Ba3, of the rating for Dana's
$400 million senior unsecured revolving credit facility due November
- Upgrade to Ba2, from Ba3, of the ratings of Dana's
approximately $2.2 billion of existing senior unsecured
notes with various rates and maturities;
- The balance of these notes will be reduced by the approximately
$835 million of principal to be repurchased upon the conclusion
of Dana's tender offer;
- Upgrade to Ba2, from Ba3, of the ratings of DCC's
medium term notes with various rates and maturities, supported by
- Upgrade to Ba2, from Ba3, of the senior implied rating
- Upgrade to Ba2, from Ba3, of the senior unsecured
issuer rating for Dana;
- Confirmation of Dana's SGL-2 speculative grade liquidity
Dana commenced a tender offer on November 15, 2004 for its $250
million of 10.25% notes due 2010, Euro 200 million
of 9% Euro notes due 2011 and $575 million of 9%
notes due 2011 (the "high yield notes"). The holders of approximately
$835 million in aggregate principal amount of these notes have
tendered their notes pursuant to the offer )at an aggregate premium estimated
at $180 million). This represents approximately 76%
of the principal amount of Notes included in the offer. In addition
at least 51% of the holders of each issue have tendered,
providing the company with the requisite consents to adopt its proposed
amendments with respect to each series of notes subject to the offer.
The amendments will be applicable to the stub portion of the notes which
were not tendered.
Moody's has rated the stub portion of high yield notes that were not tendered
on a parallel basis with all of Dana's other senior unsecured notes,
despite the fact that the terms will be amended to remove most of the
covenants and certain events of default. While these notes will
no longer possess either cross-acceleration rights or an automatic
event of default upon bankruptcy or insolvency, non-payment
of interest or principal will be retained as events of default.
In addition, the holders of the stub notes will retain the right
to vote along with all other senior unsecured creditors regarding their
approval of any future plan or reorganization.
Dana currently has a maximum of $200 million of additional availability
in place under its accounts receivable securitization facility which is
not rated by Moody's. The maximum amount of the securitization
commitment was reduced from $400 million in connection with the
sale of AAG.
The upgrades of Dana's and DCC's fundamental debt ratings and the stable
outlook reflect the pro forma principal and interest reductions that will
result from the sale of AAG and the proposed notes offering. It
is additionally Moody's belief that Dana is realizing sustainable improvements
of its performance metrics and operating cash flow generation (although
these improvements were to some extent offset in 2004 by rising steel
prices, lowered North American light vehicle production levels,
and higher-than-expected launch costs incurred for several
new platforms). Management is confident that the implementation
of several structural changes to the way Dana conducts business will continue
generating improved cash flows on a prospective basis. The most
notable developments include Dana's near-completion of its restructuring
and consolidation program, which is driving improved operating margins
and will result in greatly reduced future cash outflows that supported
the plan's implementation; greater centralization of key business
decisions; and the establishment of a series of best practices.
Dana's most recent initiative to centralize its purchasing function (which
comprises approximately 60% of the company's overall cost of goods
sold) is reportedly now well under way and is expected to be the critical
change that will enable Dana to fully offset anticipated customer price
givebacks during 2005. At this point Dana has also made significant
headway with regard to up-front cash outlays associated with scheduled
new program launches, has realized better operating control over
these launches, and is now benefiting from revenue generation associated
with several of these launches.
Dana's fundamental ratings remain constrained by the company's concentration
of approximately 69% of its revenues within North America,
where light vehicle production volumes are weakening due to high dealer
inventories. Dana's revenue base is heavily concentrated with Ford,
General Motors, and DaimlerChrysler, which account for approximately
49% of the company's revenues but are notably experiencing greater
competitive pressures and lower anticipated production volumes.
Moody's additionally notes that Dana's achievement of its base case 2005
financial plan is highly dependent upon assumptions regarding the company's
realization of significant purchasing savings, new business launches,
and market growth. Other potentially meaningful offsets to Dana's
anticipated cash flow improvements include the potential for steel and
other commodity prices to continue to rise or for the popularity of SUV's
to decline in the face of rising gasoline prices. Dana must absorb
an estimated 2.5% (approx. $220 million) of
customer price reductions annually.
While Dana's sale of the AAG business will result in net cash proceeds
to the company approximating $950 million, the company will
be giving up an asset that was formerly accretive to Dana's overall cash
flow performance. Dana's remaining operations will notably be considerably
less diversified following the AAG asset sale, which may offset
the expected benefits to management of being able to focus Dana's financial
capital and managerial efforts on the original equipment business lines.
On the other hand, there was very limited crossover of product lines
between Dana's OEM and aftermarket businesses, which limited the
synergies that the company was able to realize by maintaining both businesses.
Moody's believes that Dana's new business awards over the past year have
lagged the industry due to insufficient focus on new business or new technology
development until recently, as well as a distractions from the hostile
takeover attempt by ArvinMeritor last year and the unanticipated transition
to a new CEO. New structures launches during the past year have
been significant, but did encounter unanticipated complications.
Dana has since resolved the procedural problems surrounding these launches
and does not expect them to be repeated as a result of the implementation
of a series of best practices.
Moody's continues to rate Dana and DCC on a parallel basis, given
the operating agreement in place among Dana and DCC, as well as
a tax sharing agreement. Moody's also notes the existence of certain
cross defaults among the respective debt commitments of Dana and DCC.
While DCC expects to have sufficient ability to liquidate assets to cover
its own scheduled debt reduction and Dana has never previously downstreamed
funds for this purpose, Moody's believes that Dana would be highly
motivated to downstream funds to DCC if this were determined to be necessary
to preclude any future payment defaults by DCC. As of September
30, 2004, DCC had approximately $490 million of debt
still outstanding. Moody's also notes that the deferred tax liability
at DCC will steadily unwind over time, given that no new business
is being created at the finance subsidiary. While Dana's existing
NOL carryforwards are expected to cover a significant portion of the resulting
tax obligations, the company will eventually have to satisfy the
balance of the tax obligations with cash payments over a several year
The confirmation of the SGL-2 speculative-grade liquidity
rating reflects that Dana continues to have good liquidity. Moody's
estimates that Dana would have pro forma consolidated cash of approximately
$630 million at September 30 after consideration of the excess
proceeds from the aftermarket sale and notes offering. Existing
cash would satisfy the near-term maturities. Moody's notes
that it is presently necessary for Dana to maintain an approximately $350
million base level of cash to cover approximately $190 million
in cash collateral requirements for letters of credit and surety bonds,
account for cash located at foreign subsidiaries, and support daily
operations. Dana Credit's cash balance exceeds debt maturities
through the end of 2006. Moody's believes Dana will generate
positive free cash flow after capital expenditures and dividends in 2005.
Management believes cash requirements for interest payments and pension
contributions will decline due to the debt reduction, lowered coupon
rate on the new bonds relative to the existing notes, and the special
contribution to the pension. Dana's $200 million accounts
receivable securitization program and $400 million revolving credit
facility mature in 2005. However, Moody's notes that
because Dana's assets are not encumbered, the company should
have substantial flexibility to either obtain new liquidity agreements
or pursue asset sales to generate additional cash if necessary.
Future events that would likely result in an improved outlook or additional
rating upgrades include steadily improving credit protection measures,
a proven ability to offset customer price concessions and materials costs
with operating improvements, continued debt and leverage reductions
through free cash flow generation and possibly secondary offerings of
common stock, and a stepped up pace of new business awards for high-value-added
products with a more diversified customer base.
Future events that could result in a lowered outlook or ratings downgrade
include an inability to offset any future increases in steel, energy
or other critical commodity prices, sharply reduced North American
production levels, an inability to generate the projected purchasing
savings, evidence of declining markets shares, a failure to
continue development of state-of-the-art technologies,
a material debt-financed acquisition; increasing customer
price compression; and or material increases in the company's dividend
policy, or the initiation of substantial programs for share repurchases.
The following ratios for Dana (with DCC on an equity basis) are presented
pro forma for the sale of AAG, the proposed application of AAG net
proceeds, and the proposed notes offering. For the last twelve
months ended September 30, 2004 Dana had pro forma net debt/EBITDA
leverage approximating 3.1x including only on-balance sheet
items as debt. Only cash in excess of $350 million was credited
against debt due to the amount of cash located at foreign subsidiaries
and also the company's cash requirements to collateralize letters of credit
and surety bonds and support daily operations. Pro forma total
debt/EBITDAR leverage (including the present value of operating leases
and certain other off-balance sheet items debt) approximates 4.2x.
EBIT coverage of cash interest for the LTM period ended September 30,
2004 approximated 2.2x. Reported EBIT and EBITDAR were adjusted
to add back an estimated $10 million of non-recurring charges.
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
current annual revenues for continuing operations (excluding sales of
the automotive aftermarket business) is approximately $8.8
Michael J. Mulvaney
Corporate Finance Group
Moody's Investors Service
Lisa B. Matalon
VP - Senior Credit Officer
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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