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Rating Action:

Moody's changes PACCAR outlook to negative

24 Aug 2009

Approximately $4 billion of debt affected

New York, August 24, 2009 -- Moody's Investors Service affirmed the A1 long-term and Prime-1 short-term ratings of PACCAR Inc (PACCAR), PACCAR Financial Corporation (PFC), and PACCAR Financial Europe B.V. (PFE), and also assigned an A1 long-term and Prime-1 short-term rating to PACCAR Financial Plc (PFP). The outlook for the A1 long-term ratings was changed to negative from stable. PFC, PFE and PFP are directly or indirectly responsible for providing retail and wholesale financing in support of PACCAR's commercial vehicle operations in North America, Europe and the UK respectively, and their ratings are based on support agreements from PACCAR. These actions do not affect the ratings of PACCAR Mexico S.A. de C.V.

The negative outlook reflects the challenges that PACCAR will face in responding to the severe downturn in North American and European truck demand, and in restoring credit metrics that are more supportive of the A1 rating. This economic downturn is also eroding the portfolio quality and return measures of PACCAR's global financial services operations, which include PFC, PFE and PFP. PACCAR's credit metrics will be very weak during 2009. However, they should strengthen considerably during 2010 as truck demand stabilizes and the company's cost reduction and profit improvement initiatives begin to gain more traction. Nevertheless, 2010's metrics will likely remain below the levels necessary to support the A1 rating over the long term. The key driver of PACCAR's ability to sustain the A1 rating will be the degree to which the company remains on track to deliver much more robust performance by 2011. Consequently, the following interim benchmarks will be used during 2010 to assess the company's progress: achieving EBITA/interest exceeding 5x, generating annual free cash flow of over $400 million at the industrial operations, maintaining market share positions in the North American and European truck markets that are near current levels, and steadily improving the past due and charge-off ratios of its financial service operations. Any determination by Moody's that PACCAR is unlikely to meet these benchmarks during 2010, or to remain on track for further improvement during 2011, could lead to a downgrade of the A1 rating.

PACCAR is the world's third-largest producer of heavy trucks. In North America it competes in the class 6, 7 and 8 segments; in Europe it competes in the class 5 through 8 segments. During the past decade, PACCAR's truck operations in both North America and Europe have enjoyed steady gains in market share, industry-leading levels of operating efficiency, and the highest returns among its competitors. As a result, the company's truck operations have been largely debt-free, and have generated exceptional levels of earnings, free cash flow, and debt service. These measures have provided considerable support for the A1 rating through 2008, with EBITA/interest greater than 30x; debt/EBITDA approximating 0.3x, and free cash flow/debt in excess of 70%. However, since peaking at 325,000 units in 2006, US and Canadian heavy truck shipments are expected to fall to approximately 100,000 for 2009, and European shipments will have declined from 335,000 units in 2007 to approximately 165,000 during 2009. As a result of this unprecedented pace of cyclical decline, PACCAR's credit metrics will be very weak for the A1 rating level. During 2009 it is likely that EBITA/interest will be less than 2x, debt/EBITDA will be approximately 1.5x, and free cash flow will be breakeven to modestly negative.

The downturn will also have had a negative impact on the consolidated performance of PACCAR's global financial services operations; these operations have a total receivable portfolio of approximately $8.8 billion. As PACCAR's truck shipments have declined and as the financial stress on trucking firms has increased, the level of delinquencies and charge-offs of the financial service operations has risen considerably. The percentage of receivables past-due 30 days rose steadily from 1.1% in 2006 to over 4.7% at June 2009. In addition the level of charge-offs for the six months through June 2009 increased to $61 million from $38 million for the same period in 2008. One factor which helps to moderate the impact of this portfolio erosion is the relatively low leverage of the financial services operations. At June 2009, the ratio of debt/equity for PACCAR's financial service operations was 4.6x; this is a very low level of leverage compared with that of the financial service operations of other companies covered by Moody's Heavy Manufacturing Methodology. PACCAR has also improved its liquidity position. Key liquidity sources include $2.0 billion in cash and marketable securities and $3.0 billion in committed credit facilities. These facilities include a $1 billion revolving credit facility that matures in June 2012, and a 364-day facility that matures in June 2010, but which has a one-year term-out provision. There is considerable headroom under the facilities' net worth covenants. We believe that these liquidity sources provide adequate coverage for all debt coming due during the coming twelve months. This debt includes approximately $2.8 billion in commercial paper outstandings and current maturities of long-term debt.

Moody's expects that during 2010 North American truck demand will improve modestly and that it will be flat in Europe. This relative stabilization in demand, combined with the benefits that should accrue from PACCAR's restructuring efforts and its solid global competitive position, should support improvement in performance and credit metrics during 2010.

The last rating action on PACCAR Inc was the assignment of an A1 rating to the company's first-time issuance of long-term debt on November 18, 2008.

The principal methodology used in rating PACCAR Inc was the Heavy Manufacturing Methodology, which can be found at www.moodys.com in the Credit Policy & Methodologies directory, in the Ratings Methodologies subdirectory. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Credit Policy & Methodologies directory.

New York
Michael J. Mulvaney
Managing Director
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's changes PACCAR outlook to negative
No Related Data.
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