Correction - Fitch Revises Navistar's & NFC's Outlooks to Positive; Affirms Ratings at 'BB-'

(This is a revision of a release issued on March 17, 2010. It corrects the rating for the senior subordinated notes to 'B'.) Fitch Ratings has revised Navistar International Corporation's (NAV) and Navistar Financial Corp.'s (NFC) Rating Outlooks to Positive from Negative and affirmed the companies' long-term Issuer Default Ratings (IDRs) at 'BB-'. The Outlook revisions are driven by improvement in the financial profile of NFC following the signing of an operating agreement with GE Capital (GECC) and by NAV's financial performance in the past year. Historically, Fitch had concerns with NFC's funding, capitalization, and asset quality performance, but they have been eliminated or reduced with the new agreement with GECC.

Fitch affirms the following ratings:

Navistar International Corp.

--IDR at 'BB-';

--Senior unsecured notes at 'BB-'.

--Senior subordinated notes at 'B'.

Navistar Financial Corp.

--IDR at 'BB-';

--Senior unsecured bank lines at 'BB-'.

The ratings cover approximately $1.8 billion of outstanding debt at NAV and $3.0 billion of outstanding debt at NFC as of Jan. 31, 2010. Due to NFC's close operating relationship and importance to the parent, its ratings are directly linked to those of the ultimate parent. The relationship is governed by the Master Intercompany Agreement, additionally there is a requirement referenced in the NFC credit agreement, requiring Navistar, Inc. and NAV to own 100% of NFC's equity at all times.

The Positive Outlook reflects Fitch's assessment that rating upgrades may be warranted depending on performance in the next year. Many of Fitch's key concerns for the consolidated company will be reduced or eliminated by the GECC agreement. As the existing retail portfolio runs off, performance of the manufacturing operations will be the key driver of NAV's credit quality. Improvement of the company's ratings will be driven by the pace of the truck market's rebound, success of the company's exhaust gas recirculation (EGR) emissions strategy, improvement in profitability and leverage metrics, and ability to continue to generate free cash flow on an annualized basis.

Fitch expects top line growth at NAV this year but believes margins could contract as a smaller portion of its business comes from military sales. Free cash flow is likely to also decline this year as the company increases capital expenditures and pension contributions. Beyond 2010, profitable growth looks likely as truck markets rebound from trough levels. The rating affirmations reflect solid credit metrics for the 'BB-' category, adequate liquidity position, U.S. and Canada market share leadership in Class 6-8 trucks and school buses, competitive engine portfolio, strong North American distribution network, significant military business, and potential future success with several business initiatives including the Mahindra & Mahindra joint venture, Caterpillar (CAT) joint venture, and Monaco RV business. The resolution of material accounting weaknesses also supports the ratings affirmations.

Credit concerns include the continued weakness in the truck market (especially in the first half of 2010 with the adoption of new emissions standards), significant pension liabilities and cash pension contributions, uncertainly around the success of NAV's EGR emissions strategy and dependence on the North American market that contributed approximately 91% of the company's 2009 fiscal-year revenue. Litigation related to past financial restatements and accounting controls is also a concern. Fitch is also concerned with the UAW labor contract that expires at the end of September.

NFC recently entered into an agreement with GECC to fund the retail portion of NFC's business. Fitch views the agreement with GECC as a positive as it will reduce funding and capital needs and will continue to allow NAV to offer retail financing to its customers. Additionally, GECC's funding capacity may allow NAV to obtain a greater share of fleet customers that under NFC alone could not always get the amount of funding that was needed and/or with competitive pricing and terms. GECC will begin NFC's retail funding on a go forward basis as early as the end of this month. Term of the agreement is three years renewed annually unless GECC or NFC gives a one-year advance notice of cancellation. GECC will bear the first loss up to 10% of the amount financed. NFC has a large market share of its wholesale financing business but only about 10% of its retail financing is done through NFC. NFC's retail portfolio at the end of its first quarter ending Jan.31, 2010 was $1.865 billion, and the majority of the portfolio will runoff over the next two to three years. NFC will retain control of its wholesale portfolio, primarily for floorplan financing. GECC has had a relationship since 1986 with NAV in Canada as the provider of wholesale, retail, lease and parts financing in that country.

At the end of NAV's first quarter ending Jan. 31, 2010, Fitch calculates NAV had a liquidity position of approximately $669 million, consisting of $668 million of cash and equivalents and $190 million in aggregate credit facility capacity, less $189 million of current maturities of long-term debt. NAV's $200 million secured asset-backed credit facility due June 2012 has a $10 million liquidity block against it and has never been borrowed against. This bank revolver is subject to a borrowing base that could decrease the availability of the facility.

Net manufacturing operations debt at the end of NAV's first quarter was $1.826 billion. This consisted of the company's $249 million of capital leases and sale/leaseback debt; $131 million of majority-owned dealership debt; $964 million 2021 senior unsecured notes; $461 million 2014 senior subordinated convertible notes; and $21 million of other debt. NAV's majority owned dealership debt is comprised of wholesale (floor plan) financing and also retail financing on lease and rental fleets for the Dealcor dealers NAV has an ownership interest in. Dealcor Dealerships that are sold assume the debt that is associated with them.

Due to the expected tough first quarter comparison with last year, which benefited from the Ford settlement and more military business, NAV's leverage and coverage metrics have weakened from fiscal 2009. Fitch expects NAV's credit metrics to strengthen later in the year and into 2011 with the truck cycle rebound and newly awarded military contracts. NAV's LTM debt-to-EBITDA ratio as of its latest quarter was 3.4 times (x) compared to 2.5x in its 2009 fiscal year. The company's LTM EBITDA-to-interest coverage in its latest quarter decreased to 5.0x versus 7.9x in its 2009 fiscal year. NAV's LTM EBITDA margins have contracted to 4.9% compared to 7% in its 2009 fiscal year.

Most major global truck markets including the U.S. are expected to rebound slowly in 2010 following a very deep trough. At the end of calendar year 2009, U.S. industry medium and heavy duty truck sales were down 55.4% (321,761 units) from their peak in 2006 at 581,194 units. In 2009, U.S. medium and heavy truck sales were down 29.6%. NAV is forecasting that the traditional U.S. and Canada Class 6 - 8 truck markets will expand approximately 7 to 18% in its current fiscal year to between 195,000 to 215,000 units, a range that Fitch believes is reasonable. Fitch expects North American medium and heavy duty sales to be stronger in the second half of the year.

NFC has shown improved profitability metrics, as the company reported net income of $29 million for the year ending Oct. 31, 2009 versus a loss of $31 million for the comparable period in 2008. Improved profitability was driven by reduced borrowing costs. Asset quality has shown stabilization as delinquencies have declined slightly. Barring a dramatic increase in used truck inventory, Fitch would expect the current retail portfolio to decline and perform consistently with historical metrics. With the signing of the GECC deal and amortization of the current retail portfolio, Fitch sees substantially improved capitalization metrics versus historical levels. With the signing of the agreement with GECC, Fitch envisions NFC to become a diminishing factor in the overall ratings of NAV.

Fitch expects NAV will be able to end its current fiscal year with a manufacturing cash balance greater than $1 billion, which is line with its fiscal 2009 year end cash position. Negative free cash flow in the first quarter is expected to reverse in the second half of the year driven by the timing of military unit deliveries and to a lesser degree higher truck volumes; however, positive free cash flow for the year is expected to contract from 2009 due to increased capital expenditures and pension contributions. Capital expenditures of between $250 million to $350 million are expected this year, which is a more normal range for NAV's business to grow than the lower levels of $150 million and $168 million experienced in its fiscal 2009 and 2008 respectively. Further investments in NAV's Mahindra & Mahindra and CAT joint ventures this year are also expected. Other uses of cash in NAV's current fiscal year include pension contributions described later and cash interest expense that Fitch estimates will be approximately $75-100 million. OPEB contributions are expected to be negligible. Cash restructuring charges are possible this year if NAV closes its currently idled Chatham, Canada assembly plant, but Fitch expects them to be less than the $59 million of restructuring charges last year related to the closing of its Indianapolis plants. NAV does not have plans to reduce its debt in the near term. Fitch also does not expect NAV to make any major acquisitions this year after acquiring Monaco Coach last year for $50 million. NAV does not currently have an open share repurchase program, last year it repurchased $29 million of its common stock under its last repurchase program that has expired.

NAV's pension plan funding status in its fiscal 2009 declined to 60.6% ($1.5 billion underfunded) compared to 74.8% in 2008. The $745 million decrease was due mainly to a $825 million actuarial loss related to a decrease in the discount rate used to determine the present value of the projected benefit obligations (discount rate at Oct. 31, 2009 was 5.4% compared to 8.3% at Oct. 31, 2008). The decline in the funded status was partially offset by asset returns. NAV contributed $37 million to its pension plans in 2009 and estimates contributions in 2010 will be $150 million (the company contributed $11 million in its first quarter) and at least $256 million per year in 2011 through 2013 to comply with existing U.S. pension plan regulations. At Oct. 31, 2009, equities accounted for 66% of NAV's pension plan assets including 7% in the company's own stock, exposing NAV to additional market and diversification risk. The remaining pension plan assets were made up of 30% debt securities and 4% other, including cash.

Applicable criteria are available at 'www.fitchratings.com' and specifically include:

--'Corporate Rating Methodology' (Nov. 24, 2009).

Additional information is available at 'www.fitchratings.com'.

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