Fitch Assigns Indicative Rating of 'BB+' to ArvinMeritor Notes

NEW YORK--Sept. 2, 2005--Fitch Ratings has affirmed the senior unsecured 'BB+' rating and Stable Outlook of ArvinMeritor, Inc. (ARM). The company has announced an exchange tender offer for up to $300 million in face amount of its $499 million 6.8% notes due 2009 and its $150 million 7 1/8% notes also due 2009. Fitch has assigned an indicative rating of 'BB+' and a Stable Outlook to the new issue. The new debt would mature in 2015 and has not yet been priced.

The new notes would extend the company's maturity profile, which would otherwise have significant maturities in 2009. Prospective rating actions for ArvinMeritor will depend on the company's ability to reduce its cost structure and reverse deteriorating margins in its LVS segment. This segment has been adversely affected by production cutbacks, restructuring activities, and high raw material prices. Fitch will also monitor the potential for modest balance sheet improvement through the sale of noncore assets, raw material cost pressures, light and heavy vehicle industry production, and the impact of more stringent diesel air emissions regulations. The company's consolidated operating profile has benefited from its exposure to the heavy-duty truck market, which is expected to remain strong through at least 2006. Negative cash flow in 2005 may be offset by asset sales, leading to only modest balance sheet deterioration for the year.

Weak conditions in the automotive supply business and the high number of automotive assets available for sale have led ArvinMeritor to consider offers for individual segments of its LVA operations. Nevertheless, the company remains focused on the sale of noncore assets and has successfully completed transactions in the current fiscal year, including the Roll Coater operations for $163 million in November and one LVS exhaust facility at $34 million in December.

Assuming steadier production volumes in fiscal 2006 for both the Light Vehicle Systems (LVS) and Heavy Vehicle Systems (HVS) groups, margin should improve due to operating leverage and modest raw material price relief. LVS operating leverage should be derived from both moderately improved and steadier customer production volumes as well as from previously announced restructuring cost savings. HVS should also see modest margin improvement from steel pricing and operating efficiencies as industry bottlenecks constrained production in early fiscal 2005. However, Fitch expects modest deterioration in HVS industry conditions for fiscal 2007 as more stringent air emissions regulations take effect. Production volumes are expected to decline by a much more moderate rate than the 50% decline evidenced in the previous trough. However, Fitch also recognizes that the industry has already begun to prepare for the regulations and that the implementation of the new emissions standards represents an opportunity for ArvinMeritor due to its presence in this market.

When the current level of emissions regulation was implemented in 2002, truck engine manufacturers were late in getting new product out for field testing. As a result, fleet operators did not know what to expect from the new truck engines in terms of fuel economy, durability, and maintenance. This led fleet operators to modestly prebuy their capacity needs with old-technology diesel engines, contributing to a protracted cycle trough. This time around, the OEMs are currently producing test vehicles, which meet the emissions standards set for 2007, allowing fleet operators to get a better understanding of the new technology's capabilities in advance of the legislated deadline.

ArvinMeritor's sales opportunity arises from its exhaust system expertise. The reduction of diesel exhaust emissions focuses on the level of Nitrous Oxide (NOX) and Particulate Matter (PM). Cylinder compression tuning and exhaust gas recirculation (EGR) have garnered the most attention with respect to emissions reduction technology in the U.S. However, there are certain limitations that require engine-makers to utilize some form of exhaust after-treatment, creating the opportunity for ArvinMeritor to present heavy truck engine-makers with their technologies.

As a result of the industry's early road-testing and the company's exhaust expertise, Fitch believes that ArvinMeritor will experience a decline in HVS volume and margin in 2007 but not to the degree seen in the previous HVS cycle trough. In addition, LVS cost savings from restructuring and HVS spec'ed-in components (OEM specified components used in the standard factory assembly of the truck), which includes emissions business, slated for launch in fiscal 2007 should provide an offset to anticipated heavy vehicle production weakness.

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