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Rating Action:

Moody's affirms Navistar ratings with CFR at B2; outlook negative

15 Apr 2020

New York, April 15, 2020 -- Moody's Investors Service, ("Moody's") affirmed the ratings of Navistar International Corp. ("Navistar"), including the corporate family rating (CFR) at B2 and senior unsecured rating at B3, and also affirmed the rating of its major operating subsidiary, Navistar, Inc. with senior secured at Ba2 and the industrial revenue bonds at B1. The Speculative Grade Liquidity rating is unchanged at SGL-3. The outlook is changed to negative from stable.

The following rating actions were taken:

Affirmations:

..Issuer: Navistar International Corp.

.... Corporate Family Rating, Affirmed B2

.... Probability of Default Rating, Affirmed B2-PD

....Senior Unsecured Regular Bond/Debenture, Affirmed B3 (LGD5)

..Issuer: Navistar, Inc.

....Senior Secured Bank Credit Facility, Affirmed Ba2 (LGD2)

..Issuer: Cook (County of) IL

....Senior Unsecured Revenue Bonds, Affirmed B1 (LGD3)

..Issuer: Illinois Finance Authority

....Senior Unsecured Revenue Bonds, Affirmed B1 (LGD3)

Outlook Actions:

..Issuer: Navistar International Corp.

....Outlook, Changed To Negative From Stable

..Issuer: Navistar, Inc.

....Outlook, Changed To Negative From Stable

RATINGS RATIONALE

The rapid and widening spread of the coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines are creating a severe and extensive credit shock across many sectors, regions and markets. The combined credit effects of these developments are unprecedented. The construction and related industries are some of the sectors that will be significantly affected by the shock given their sensitivity to global economic activity and sentiment. Navistar is vulnerable to shifts in market sentiment in these unprecedented operating conditions and remains at risk of the outbreak continuing to spread. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial credit implications of public health and safety. Today's action reflects the expected impact on Navistar of the breadth and severity of the shock, and the broad deterioration in credit quality it has triggered.

Navistar's ratings, including the B2 CFR reflect the company's position as the third-leading competitor in the North American market for medium and heavy trucks, and the consistent progress Navistar has made in strengthening its operating performance and competitive position. This progress is reflected in the following (with financial metrics reflecting Moody's standard adjustments): 1) consistent market share gains; 2) a steady decline in warranty expenses from almost $900 million in 2012 to less than $300 million in 2019; 3) free cash flow of about $400 million in 2019; 4) improvement in EBITA margin from 1.2% in 2015 to 5.8% in 2019; and 5) a decline in debt-to-EBITDA from 14.3x to 5.6x over the past five years.

Navistar's operational progress is also evident in the considerable success achieved through the North American engineering and cost-sharing joint-venture with TRATON AG (formerly Volkswagen Truck & Bus). TRATON acquired a 16.6% ownership interest in Navistar in 2017, and in January 2020 offered to acquire the remaining shares of Navistar in a transaction valuing the company at $3.5 billion. While this bid might not be accepted by Navistar, or could be withdrawn in the aftermath of the coronavirus outbreak, it is another reflection of the company's improving competitive position in North America.

In addition to strengthening its manufacturing operations, Navistar has also maintained the balance sheet health and portfolio quality of its captive finance operation, Navistar Financial Corporation (NFC). NFC provides wholesale floorplan financing for approximately 72% of Navistar's dealer floorplan, and also provides retail financing to customers on a limited basis. Leverage at NFC is low with debt-to-equity at a modest 3.75 to 1 at January 2020, and portfolio quality is has remained strong with charge-offs-to-average assets remaining consistently below 1%.

The negative outlook reflects the significant deterioration that will likely occur in Navistar's operating performance and credit metrics during 2020 as a result of both the coronavirus outbreak and the already-anticipated cyclical slowdown in North American truck demand. Moody's estimates that Navistar's 2020 revenues could fall by 25% and that free cash flow could approach a negative $500 million.

Navistar's industrial operations have adequate liquidity in the form of $1.0 billion in cash at January 2020. With no debt maturities until 2024, this cash position provides ample coverage for a cash burn that could approach $500 million during 2020. The company does not have a bank revolving credit facility, other than its $125 million ABL facility that is generally used for issuing letters of credits.

NFC has approximately $650 million in asset-backed-securitization (ABS) facilities maturing during the coming twelve months, compared with about $500 million in committed facilities available to cover these maturities. The maturing ABS obligations are self-liquidating from collections on the underlying receivables. However, NFC requires ongoing access to capital in order to continue providing wholesale loans to dealers and retail loans to select customers. The company should be able to raise the necessary capital in the ABS market due to the consistently high quality of its receivable portfolio. In addition, the excess cash liquidity at Navistar's industrial operations could help to fill a potential funding gap at NFC. Nevertheless, Moody's views the ongoing gap between NFC's maturing ABS obligations ($650 million at January 2020) and available capacity under its borrowing facilities ($500 million at January 2020) as an area of potential vulnerability in the company's overall liquidity profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Navistar's rating could be downgraded if the company is not on track to restoring 2019-level financial metrics by 2021. Factors that would contribute to a downgrade include: 1) a cash burn that exceeds $500 million during 2020; 2) market share erosion in key product segments; and, 3) any weakening in the liquidity profile of Navistar and NFC.

Prospects for an upgrade during the next twelve months are modest. Nevertheless, an operating performance that is on a clear trajectory to achieve the following metrics could support an upgrade: EBITA margins above 7%, debt to EBITDA sustained below 5x and EBITA/Interest above 3x.

Navistar's principal environmental risk is its exposure to increasingly burdensome emissions regulations covering its truck and buses. The company continues to make the investments necessary to remain in compliance with these regulations. The major social risk facing the company emanates from the economic stress resulting from the coronavirus. The company's governance practices have enabled it to pursue successful operating strategies and prudent financial policies.

Navistar International Corp. is one of the largest manufacturers in the US and Canadian market for buses, medium, severe service, and heavy duty trucks. The company generated approximately $10.5 billion in revenues (excluding financial services) during the twelve months ending January 31, 2020.

The methodologies used in these ratings was Manufacturing Methodology published in March 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1206079, and Captive Finance Subsidiaries of Nonfinancial Corporations published in August 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1183459. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating outcome announced and described above.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Robert Jankowitz
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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