Market Overview

Fitch: Significant Risks Remain For Navistar Despite Equity Issuance

Share:
CHICAGO--(BUSINESS WIRE)--

Navistar's common stock offering, announced yesterday, does not alleviate significant concerns that Fitch Ratings has about the company's liquidity and negative free cash flow over the next three quarters.

Navistar (NAV) yesterday priced an offering of common stock for approximately $200 million. Proceeds will support the company's liquidity while it addresses numerous operating challenges including the transition of its engine strategy, an ongoing review of its non-core businesses, weakening industry demand for heavy and medium duty trucks, NAV's loss of market share, and restructuring. The equity issuance, together with several other recent positive developments, could potentially support a return to a Stable rating outlook in the future.

However, Fitch still believes that Navistar's near term liquidity and free cash flow will continue to be pressured by some of the operating challenges mentioned above. Also adding to Fitch's concern is margin pressure associated with the new engine strategy, future pension contributions, the cost of non-conformance penalties, and elevated warranty costs. The negative impact of these items should be partly offset by cost reductions associated with NAV's restructuring actions.

In addition to NAV's equity issuance, recent developments include a final agreement with Cummins about the addition of SCR technology to NAV's engines and the use of Cummins' 15 liter engines in some NAV trucks. The agreement reduces execution risks surrounding NAV's engine strategy, which will be implemented gradually beginning in early fiscal 2013. The agreement also mitigates concerns about NAV's ability to sell trucks with emissions compliant engines. Also, NAV reached agreements with two large shareholders to replace certain board members. The shareholders agreed to support the board's director nominees in fiscal 2013 which should provide some stability in the near term.

Manufacturing debt/EBITDA increased materially to 5.7x as of July 31, 2012, and above 7x adjusted for a new $1 billion term loan in August 2012. Leverage could remain high through the next 12 - 18 months before NAV's revised engine strategy and other strategic and operating changes become fully effective. NAV's manufacturing cash and marketable securities at July 31, 2012 (adjusted to include the new $1 billion term loan and a simultaneous reduction of NAV's ABL facility) exceeded $1.3 billion. The amount excludes proceeds from NAV's equity issuance. NAV has projected it will burn $325 - $475 million of cash in the current quarter ending Oct. 31. Fitch believes this is a realistic forecast and could be followed by additional cash burn in the first half of fiscal 2013.

Fitch could take a positive rating action if:

--Manufacturing FCF returns toward a breakeven level during fiscal 2013,

--NAV's new engine strategy is implemented on time and at moderate cost

--The company's market share begins to recover, and leverage declines materially.

Conversely, Fitch could take a negative rating action if:

--NAV's engine transition is delayed or FCF does not begin to recover in early fiscal 2013.

As of July 31, 2012, Fitch's ratings cover approximately $3 billion of debt at NAV, adjusted for the $1 billion term loan and reduction of NAV's ABL facility, and $2.3 billion of outstanding debt at the Financial Services segment, the majority of which is at NFC. Fitch continues to view NFC's performance, asset quality and leverage levels as neutral to NAV's ratings.

Fitch's currently rates Navistar as follows:

Navistar International Corporation

--Long-term IDR 'CCC';

--Senior unsecured notes 'CCC-'/'RR5';

--Senior subordinated notes 'CC'/'RR6'.

Navistar, Inc.

--Long-term IDR 'CCC';

--Senior secured bank term loan 'B'/'RR1'.

Cook County, Illinois

--Recovery zone revenue facility bonds (Navistar International Corporation Project) series 2010 'CCC-'.

Illinois Finance Authority (IFA)

--Recovery zone revenue facility bonds (Navistar International Corporation Project) series 2010 'CCC-'.

Navistar Financial Corporation

--Long-term IDR 'CCC';

--Senior secured bank credit facilities 'CCC-'/'RR5'.

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

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 8, 2012);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2012);

--'Finance and Leasing Companies Criteria' (Dec. 12, 2011);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers' (Aug. 14, 2012);

--'Rating Linkages in Nonbank Financial Subsidiary Relationships' (Nov. 29, 2011);

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012).

Applicable Criteria and Related Research:

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=659834

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686476

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.

Fitch Ratings
Primary Analyst (Navistar International Corporation)
Eric Ause, +1-312-606-2302
Senior Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Mark Oline, +1-312-368-3139
Managing Director
or
Primary Analyst (Navistar Financial Corporation)
Johann Juan, +1-312-368-3339
Director
or
Secondary Analyst
Katherine Hughes, +1-312-368-3123
Associate Director
or
Committee Chairperson
Nathan Flanders, +1-212-908-0827
Managing Director
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com





























View Comments and Join the Discussion!