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Rating Action:

Moody's lowers Navistar rating to B2; outlook is negative

Global Credit Research - 01 Aug 2012

Approximately 1 billion of notes affected

New York, August 01, 2012 -- Moody's Investors Service lowered Navistar International Corporation's Corporate Family Rating (CFR), Probability of Default Rating (PDR) and senior note rating to B2 from B1. The company's Speculative Grade Liquidity Rating was lowered to SGL-3 from SGL-2. The outlook is negative.

RATINGS RATIONALE

The downgrade of Navistar's ratings reflects the significant challenges the company will face during the next eighteen months in re-establishing the profitability and competitiveness of its US and Canadian truck operations in light of the failure to achieve EPA certification of its EGR emissions technology, the significant reductions in military revenues and substantially higher engine warranty reserves. These challenges have resulted in sizable losses and negative cash flow during the first half of fiscal 2012 that could continue if not addressed . It is critical that Navistar remain firmly on track with its plan to transition to an SGR emission control platform, and at the same time rebuild the market share position and profit margins of its truck operations. In the absence of consistent success in these areas during 2013, the company could face a prolonged period of negative cash flow, weak credit metrics and eroding liquidity.

Navistar will face a number of challenges as it begins to employ SCR emission technology. These include ensuring adequate operating performance of its engines, achieving sufficient pricing for its product, and rebuilding market share that was lost as a result of market uncertainty over its strategy. We expect that this transition period will last well into 2013 and that a significant rebound in truck profitability will not occur until the latter half of this transition.

An unexpected spike in engine warranty expenditures required Navistar to increase warranty reserves with a $227 million true-up during the first half of fiscal 2012, thereby contributing to a sizable operating loss. The company appears to have identified the sources of these problems. It is moving to address them and we expect that future expenditures will begin to decline.

A more sustained source of pressure on earnings will be the wind down of profitable MRAP vehicle sales to the US military due to the withdrawal of troops from Iraq. This will contribute to weakness in Navistar's 2012 earnings.

The negative outlook recognizes the execution risks that Navistar will face in transitioning from EGR to SCR emissions technology, reducing engine warranty expenditures, and rebuilding share that has been lost due to the uncertainty surrounding its emissions strategy. If the company is not able to make clear progress in these areas during 2013, the rating would be subject to further downgrade.

We expect that Navistar will have adequate liquidity during the coming twelve months as it implements the transition to SCR and attempts to reverse near term operating losses and negative cash flow. The company's principal source of liquidity is $681 million in manufacturing company cash as of April 30, 2012 and approximately $52 million in availability under an ABL facility after a $138 million borrowing in June 2012. These sources should provide adequate coverage of $130 million in maturing manufacturing debt and negative operating cash flow that could amount to several hundred million dollars during the transition period. Navistar's captive finance operation, Navistar Financial Corporation (NFC), continues to fund the company's dealer floor plan requirements. The alliance with GE Capital continues to fund a significant portion of Navistar's retail sales. NFC has approximately $1.3 billion in debt and ABS obligations coming due during the next twelve months. We anticipate that these liquidity requirements can be covered by drawings under a $500 million revolving credit facility, and continued access to the ABS market, as evidenced by the company's July 2012 issuance of $500 million in term ABS securities.

Navistar's rating could come under pressure if the company is not able to smoothly execute three key initiatives into 2013: integrating SCR technology into its lineup of medium and heavy duty engines; reducing engine warranty expenditures; and rebuilding truck market share. To avoid rating pressure Navistar would need to remain on track for generating EBITA margin approaching 2.0% for fiscal 2013. This compares with a margin of 2.7% during 2011 and -1.6% during the last twelve months ending April 30, 2012. In addition EBIT/interest would need to be above 1.25x for 2013 compared with 2.3x in 2011 and -1.6x for LTM through April 2012. (all figures reflect Moody's standard adjustments)

The rating outlook could be stabilized if Navistar can implement these initiatives and maintain a trajectory toward the following metrics for 2013: EBITA margin of 2.5%; EBIT/interest of 2.0x; and manufacturing company free cash flow exceeding $200 million. This compares with manufacturing company free cash flow of about $250 million for 2011 and negative $125 million for the LTM through April 2012.

The principal methodology used in rating Navistar was the Global Heavy Manufacturing Industry Methodology published in November 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA published in June 2009. Please see the Credit Policy page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

The Global Scale Credit Ratings on this press release that are issued by one of Moody's affiliates outside the EU are endorsed by Moody's Investors Service Ltd., One Canada Square, Canary Wharf, London E 14 5FA, UK, 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 has issued a particular Credit Rating is available on www.moodys.com.

For ratings issued on a program, series or category/class of debt, this announcement provides relevant regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt 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 relevant regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides relevant 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.

Information sources used to prepare the rating are the following : parties involved in the ratings, parties not involved in the ratings, public information, confidential and proprietary Moody's Investors Service information, and confidential and proprietary Moody's Analytics information.

Moody's considers the quality of information available on the rated entity, obligation or credit satisfactory for the purposes of issuing a rating.

Moody's adopts all necessary measures so that the information it uses in assigning a 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 the ratings disclosure page on www.moodys.com for general disclosure on potential conflicts of interests.

Please see the ratings disclosure page on www.moodys.com for information on (A) MCO's major shareholders (above 5%) and for (B) further information regarding certain affiliations that may exist between directors of MCO and rated entities as well as (C) the names of entities that hold ratings from MIS that have also publicly reported to the SEC an ownership interest in MCO of more than 5%. A member of the board of directors of this rated entity may also be a member of the board of directors of a shareholder of Moody's Corporation; however, Moody's has not independently verified this matter.

Please see Moody's Rating Symbols and Definitions on the Rating Process page on www.moodys.com for further information on the meaning of each rating category and the definition of default and recovery.

Please see ratings tab on the issuer/entity page on www.moodys.com for the last rating action and the rating history.

The date on which some ratings were first released goes back to a time before Moody's ratings were fully digitized and accurate data may not be available. Consequently, Moody's 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 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.

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

Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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

Moody's lowers Navistar rating to B2; outlook is negative
No Related Data.

 

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