Fitch Downgrades ArvinMeritor's IDR to 'BB', Unsecured to 'BB-'; Outlook Negative.

CHICAGO -- Fitch Ratings has downgraded ArvinMeritor as follows:

--Issuer Default Rating (IDR) to 'BB' from 'BB+';

--Senior unsecured to 'BB-' from 'BB+';

--Trust preferred to 'B' from 'BB-'.

Fitch has also assigned an indicative rating to the new secured bank facility of 'BB+', subject to review of the final amount and terms of the new agreement.

The rating action reflects the challenges faced by ArvinMeritor's Light Vehicle Systems (LVS) group, which has experienced persistent margin erosion due to pricing pressures, high commodity costs and production declines among domestic producers. The company has embarked on a restructuring program that should help to stabilize margins, but the operational and financial stresses in the industry will make it difficult to substantially improve margins in this sector in the short term. ArvinMeritor does have good geographic and customer diversification, and its product position, particularly in emissions control, should enhance results over the long term. ArvinMeritor could also benefit from re-sourcing contracts away from Dana.

Along with the stresses in the LVS group, ArvinMeritor's Commercial Vehicle Systems (CVS) group will face a strong downturn in demand in 2007, related to the introduction of new emissions standards and the associated 2006 pre-buy. Margins in this sector have benefited from strong cyclical conditions and have sustained consolidated ArvinMeritor margins. ArvinMeritor will be hard-pressed to maintain margins by offsetting the downturn in demand with production efficiencies and other cost-saving measures.

The downgrade of the senior unsecured debt reflects the impairment that these debt holders will experience through the granting of security to bank lenders. Under ArvinMeritor's unsecured indentures, the company has a limitation on liens of up to 15% of the value of consolidated net tangible assets, which is defined to exclude certain 'principal property' assets. Nevertheless, Fitch views the establishment of the new bank agreement as a positive development, ensuring the company's liquidity over the near term, in what is likely to be a very uncertain period in the domestic auto industry (including the 2007 contract re-opening between the domestic OEM's and the UAW). The company has made steady progress in strengthening its balance sheet, largely with the assistance of asset sales, and this could continue through 2006. Fitch expects ArvinMeritor to remain free cash flow positive in fiscal 2006, as the company has projected, although recent free cash flow forecasts have also benefited from substantially reduced required pension contributions in 2006. Stabilization of the rating will focus on ArvinMeritor's ability to reverse the deterioration in LVS margins and the company's operating performance in 2007 as it faces a strong drop in end demand at its CVS operations.

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