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Global Credit Research - 06 Oct 2010
Approximately $1.3 billion of debt affected
New York, October 06, 2010 -- Moody's Investors Service changed the outlook of Navistar International
Corporation (Navistar) to Positive from Stable and assigned a B1 rating
to the company's $225 million issuance of tax-exempt
Recovery Zone Facility (RZF) bonds. Moody's also affirmed
Navistar's B1 Corporate Family Rating (CFR) and Probability of Default
Rating (PDR), the B1 rating of the company's $1 billion
in 8.25% senior unsecured notes due 2021, and its
SGL-2 speculative grade liquidity rating.
The positive outlook reflects the continuing recovery in the North American
medium and heavy truck markets. In addition, Navistar's
credit metrics have held up better than expected during 2010 despite the
anticipated decline in military revenues as certain contracts rolled off
and the engine supply arrangement with Ford that terminated in December
2009. While these factors have contributed to a modest weakening
in some of Navistar's credit metrics for the LTM period through
July 2010, we believe that the company's overall performance
has held up well. This better-than-expected performance
is largely due to the recovery in the truck market and Navistar's
strong performance in this sector.
Approximately $135 million of the tax-exempt RZF bonds will
be issued by the Illinois Finance Authority (IFA), and $90
million will be issued by Cook County, Illinois. Neither
the IFA nor Cook County (the issuers) will have any responsibility for
principal or interest payments due under the RZF bonds. The bonds
will be serviced by a loan agreement between Navistar and the issuers.
This loan agreement will be pledged to the bond Trustee, and will
be unconditionally guaranteed by Navistar's principal operating
subsidiary, Navistar, Inc. This support structure mirrors
that which supports the B1 rating of Navistar's existing senior
Navistar's liquidity position is good and the principal sources of liquidity
are the $757 million in manufacturing-company cash it held
at July 31, 2010, and $180 million of availability
under its existing ABL facility maturing in 2012. In addition,
the company should continue to generate moderate levels of free cash flow
during the coming twelve months. These sources should enable the
company to comfortably fund all of its cash requirements during the coming
twelve months. The liquidity profile is further supported by the
lack of financial covenants in the ABL facility and the company's considerable
amount of unencumbered assets that are available to be pledged to potential
lenders. Navistar's principal liquidity requirement will be the
funding of approximately $145 million of maturing debt and capital
A potential contingent call on Navistar's liquidity could come from its
captive finance operation, Navistar Financial Corporation (NFC).
At year-end October 31, 2009, NFC (not rated by Moody's)
had a managed portfolio consisting of $2,076 million of retail
and lease receivables, and $835 million of wholesale notes.
During 2009 NFC had a relatively modest 9% penetration rate for
financing retail sales and leases of Navistar equipment, and its
retail/lease originations approximated $586 million. The
company's penetration of wholesale financing was a robust 96%.
As a result of a recently completed agreement, GE Capital has become
the preferred provider of retail financing in support of Navistar's truck
and bus sales in the US. As a result of this agreement NFC should
be relieved of the capital and liquidity burden necessary to support new
retail and lease originations. In addition, GE Capital's
stronger balance sheet and superior capital market access relative to
that of NFC, should improve the availability of the financing that
can be offered to retail purchasers of Navistar equipment. This
should result in a significant reduction in NFC's origination of retail
and lease financing in the future. However, the company will
continue to provide wholesale financing to its dealer network as well
as a small amount of retail notes and leases to end customers.
Moody's notes that NFC has recently renewed various wholesale funding
sources in fiscal 2010 that do not mature until 2012.
The quality of NFC's receivable portfolio is performing in line with that
of other captive finance companies in the capital goods and heavy equipment
sector. Moreover, conditions in the ABS and bank markets
indicate that NFC should not encounter any major obstacles in its attempts
to renew its various facilities and maintain adequate liquidity to fund
its remaining retail portfolio and continuing wholesale originations.
Navistar's B1 rating could improve if the North American truck market
remains on track for a sustained recovery into 2011, and Navistar's
operational initiatives to moderate its vulnerability to the truck cycle
show evidence of taking hold. Progress in these initiatives would
be demonstrated by continuing to solidify the position of its military
business and establishing solid market acceptance of its EGR engines.
An improvement in the rating would also be supported if the company's
operating performance is on track to generate EBITA/interest approximating
2.5x, (1.8x for LTM July '10) debt/EBITDA below
4x (4.3x for LTM July '10), EBITA margin exceeding
5% (4.8% for LTM July '10), and a strong
liquidity profile as evidenced by a manufacturing-company cash
position and unused borrowing facilities approximating $1 billion.
The rating could come under pressure if key elements of the company's
operational initiatives for reducing cyclicality stall, or if the
recovery in the North American truck market stalls. Metrics of
the following levels would contribute to ratings pressure: EBITA/interest
below 1.25x and debt/EBITDA above 4.5x.
The last rating action on Navistar was an assignment of the B1 rating
on October 21, 2009.
The principal methodology used in rating Navistar was Moody's Heavy Manufacturing
Methodology, published in March 2006 and available on www.moodys.com
in the Rating Methodologies sub-directory under the Research &
Ratings tab. Other methodologies and factors that may have been
considered in the process of rating this issuer can also be found in the
Rating Methodologies sub-directory on Moody's web site.
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings,
public information, confidential and proprietary Moody's Investors
Service's information, confidential and proprietary Moody's
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
MOODY'S adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
MOODY'S considers to be reliable including, when appropriate,
independent third-party sources. However, MOODY'S
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's changes Navistar rating outlook to positive
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