BorgWarner Inc. (NYSE: BWA) has been a troubled company in a troubled sector. It seems that after completing its debt rating review, Standard & Poor’s has decided it doesn’t like the auto parts business. S&P cut a prior "A-" rating down to "BBB". The good news is that this is still investment grade. The bad news is that the outlook is still negative.
S&P noted, "…declining auto sales and production in North Americaand Europe during 2009 will lead to weaker cash flow generation andhigher leverage for BorgWarner… Despite cost-cutting efforts alreadyunder way, we do not expect BorgWarner’s key credit ratios to return tolevels reached in 2007 or early 2008, even if demand stabilizes in thesecond half of 2009 or later."
S&P continues to expect auto sales in 2009 to be 10 million units (about 24% below 2008 levels.)
But this is not all bad. S&P noted that BorgWarner holds a goodmarket position in favorable product segments of the auto supplierindustry, and noted its fair financial risk profile despite recentvolatility of cash flows. Further, it argued the company’s focus oncomponents that improve vehicle fuel economy or reduce emissions giveit a healthy book of new business for the next few years.
S&P’s negative outlook reflects an expectation that key creditratios could drop below its targeted range in 2009 and its ratios couldpush credit measures below acceptable levels for the current rating.This also notes the possibility of further ratings cuts if BorgWarner facesrefinancing problems or if free operating cash flows do not turnpositive this year.
What may be important more than the actual downgrade here is thatS&P at least sees some positives for the company. In the autoparts sector, that alone might be a win in today’s markets even if adowngrade is the price.
Jon C. Ogg
January 12, 2009