Moody’s Investors Service, the credit rating agency controlled by Moody’s Corporation (MCO), has upgraded its credit ratings for ArvinMeritor Inc. (ARM) based on improvements in commercial vehicle markets.
 
The rating agency raised its corporate family and probability of default rating on ArvinMeritor from “Caa1″ to “B3″, the rating on senior secured revolving credit facility  from “B1″ to “Ba3″ “, and the rating on senior unsecured notes  from “Caa2″ to “Caa1”.
 
Pursuant to the amendment on February 5, 2010, ArvinMeritor has a revolving credit facility of $539 million, of which $143 million matures in June 2011 (for banks electing not to extend their original commitments) and the remaining $396 million matures in January 2014 (for banks electing to extend their commitments).
 
The company has issued convertible unsecured notes twice, on March 2006 and on February 2007. The 2006 issue was a $300 million of 4.625% convertible senior unsecured notes due 2026 while the other was a $200 million issue of 4% convertible senior unsecured notes due 2027.
 
Moody’s believes ArvinMeritor will benefit from the improvement in demand for commercial vehicles. At the same time, it is cautious about the slow recovery of the North American market, from which the company generates more than 50% of its revenues.
  
For the second quarter of its fiscal year 2010 ended March 31, 2010, ArvinMeritor has revealed a profit of $15 million or 18 cents per share (before special items) in stark contrast to a loss of $11 million or 15 cents per share (before special items) in the same quarter of last year. With this, the company has significantly outpaced the Zacks Consensus Estimate of a profit of 2 cents per share.
 
Sales in the quarter improved 25% to $1.2 billion. EBITDA (adjusted) doubled to $64 million from the same period last year. The higher sales and earnings were attributable to the company’s strong performance in the emerging markets and enhanced commercial vehicle volumes in North America and Europe.
 
Despite its improved results, we remain concerned about ArvinMeritor’s high customer concentration and a slower recovery in its key markets in 2010. As a result, we continue to recommend the shares of the company as Hold (Zacks #3 Rank) in the short term (1–3 months) and Neutral in the long term (6+ months). 
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