Suppliers may get high debt under control in 2024

Suppliers, after years of racking up debt amid uneven production schedules and rising costs, should be in a better position this year to get debt under control, though significant uncertainty remains, according to supplier executives and analysts.

Getting debt ratios under control has been a major focus for suppliers in recent months as inflationary pressures ease and companies prepare for more electric vehicle production. In the fourth quarter of 2023, Magna International Inc., North America's largest parts maker, reported adjusted debt of about $7.4 billion, along with adjusted earnings before interest, taxes, depreciation and amortization of $3.9 billion, giving it a debt-to-earnings ratio of 1.89-to-1. That's above the company's target of between 1-to-1 and 1.5-to-1 but also represents an improvement from ratios of 2.19 and 2.02-to-1 it reported in the second and third quarters of 2023.

Magna expects that figure to continue to fall through 2024.

"We anticipate a reduction of our leverage ratio to be back within our targeted range during 2025," Magna CFO Pat McCann said on a Feb. 9 call with investors. "Our balance sheet continues to be strong, with investment-grade ratings from the major credit agencies."

Average net debt for suppliers spiked following the COVID-19 pandemic, as parts shortages, higher material and labor costs and the need to make major investments for EV-related parts production took their tolls.

According to AlixPartners, debt among the top 300 suppliers rose by 27 percent between 2021 and 2022, and remained elevated into the first half of 2023, even as automaker net debt declined.

"There are still a lot of companies with a lot of debt," said Dan Hearsch, Americas co-leader of the automotive and industrial practice at AlixPartners.

Higher debt levels have hit suppliers particularly hard as interest rates remain elevated.

According to a January report by S&P Global Ratings, higher interest rates are a "bigger credit risk for auto suppliers compared to automakers, which tend to have better ratings and stronger liquidity," leaving suppliers open to refinancing risks.

S&P Global said it expects supplier margins and cash flow to improve this year as the cost inflations for raw materials and freight moderates and new-vehicle production improves and becomes less choppy.

But margin improvements could remain limited because of higher labor costs, energy prices, added R&D costs and new capital expenditures associated with EV-related parts programs, S&P Global said in its Industry Credit Outlook 2024 report.