Issue: Dec 2011


Moody's: North American Automotive Suppliers Are Stronger Now Than Before the Downturn



by Moodys Investor Service

The North American automotive industry's credit metrics are stronger today than before the 2008-2009 downturn even through auto sales remain well below their peak levels, according to a new report from Moody's Investors Service.

Yet, with earnings already reflecting much of the benefit of restructuring actions and cost-cutting initiatives, and amid increasing pressure for shareholder returns, Moody's believes the pace of improvement will level off in 2012.

"The median margin, interest coverage, leverage and cash flow metrics for the rated auto parts suppliers have improved moderately from pre-downturn levels," says Timothy Harrod, a Moody's Vice President, and author of the report. "Because companies reduced debt significantly during the downturn, future improvement will hinge largely on top-line growth,
which could come slowly given macroeconomic pressures."

Median profit margins, which will likely remain near 6%-6.5%, will be constrained by elevated raw material costs and ongoing pricing pressure from auto manufacturers, says Moody's.

Although many auto suppliers significantly reduced debt through bankruptcy reorganizations, distressed exchange transactions and repayments from cash flow, Moody's does not believe they will reduce debt levels much further in 2012. Companies will likely direct cash flow toward business reinvestment and shareholder return initiatives.

Auto parts suppliers with technologies that control emissions, improve fuel economy and increase passenger safety, such as BorgWarner Inc., Lear Corp. and TRW Automotive, Inc. have seen revenue growth exceed industry trends. They are also among the companies that have seen the greatest improvement in metrics since the downturn.

Profits are constrained, however, for companies such as Stanadyne Holdings Inc. that face production inefficiencies and/or were unable to reinvest sufficiently in plants and equipment during the downturn.

For more information please see the full report "North American Automotive Parts Suppliers: Industry Is Stronger Now Than Before the Downturn" on www.moodys.com


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