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S&P Rates Meritor Automotive Preliminary 'BBB'

26 May 1998

S&P Rates Meritor Automotive's $500 Million Shelf Preliminary 'BBB'

    NEW YORK, May 26 -- Standard & Poor's today assigned its
triple-'B' corporate credit rating to Meritor Automotive Inc. and its triple-
'B' rating to the company's $1 billion bank facility.  In addition, a
preliminary triple-'B' rating was assigned to the company's $500 million shelf
registration.
    The outlook is stable.
    Meritor's ratings reflect its strong market positions in two business
segments, good product, customer and geographic diversity, and management's
commitment to improving the firm's financial profile over the next few years.
Offsetting these strengths is the company's exposure to cyclical and
competitive end markets and an aggressively leveraged capital structure.
Meritor is the former automotive operation of Rockwell International
Corp. and consists of heavy vehicles systems (60% of sales) and light vehicle
systems (40% of sales).  Products in the heavy vehicle systems include axles,
brakes, transmissions, clutches, and drivelines.  Products in the light
vehicle systems include roof, door, access control, and seat adjusting systems
and suspension products and steel wheels.
    Meritor's balance sheet reflects its spinoff from Rockwell in September
1997.  Prior to the spinoff, Meritor made a $445 million cash distribution to
Rockwell through a combination of dividends and other payments.  Debt to
capital at the end of fiscal 1997 (fiscal year-end September) was
approximately 72%, which is aggressive for current ratings.  However, funds
from operations to debt was a solid 54%.  Meritor's financial profile is
expected to strengthen over the next few years as a result of healthy end
market demand and ongoing restructuring actions.  Assuming that markets remain
healthy, Meritor is expected to generate good earnings and cash flow which
should enable the company to reduce debt leverage to management's target 45%
level.  Management has indicated that it may pursue acquisitions from time to
time, and current ratings incorporate some room for moderate sized
acquisitions over the near to intermediate term.  However, any increase in
debt usage over the next few years is expected to be temporary and ratings
assume that within the next few years debt to capital will approach the
45%-50% level.  Meritor's financial results are likely to fluctuate over the
course of the business cycle.  However, funds from operations to debt is
expected to average around 35%.
    OUTLOOK: STABLE
    Upside rating potential is limited by cyclical and competitive industry
conditions and elevated debt leverage.  Downside risk is limited by
management's commitment to reducing financial risk, and the company's
geographic diversity and product variety which should mitigate cyclical
pressures to some extent, Standard & Poor's said. -- CreditWire