S&P Cuts Navistar (NAV) Long-Term Rating to 'CCC+'; Outlook Developing

October 7, 2013 9:28 AM EDT Send to a Friend
Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Illinois-based truckmaker Navistar International Corp. (NYSE: NAV) to 'CCC+' from 'B-'. The outlook is developing.

At the same time, we lowered our issue rating on Navistar Inc.'s (a NAV subsidiary) secured loan to 'B' from 'B+'. The recovery rating on the loan is '1', indicating our expectation of strong (90%-100%) recovery if a payment default occurs. In addition, we lowered the corporate credit rating on Navistar Financial Corp. to 'CCC+' from 'B-'.

In addition, we lowered our issue rating on NAV's senior unsecured notes, as well as its subordinated debt, to 'CCC-' from 'CCC'. The recovery ratings on these issues are unchanged at '6', indicating our expectation of negligible (0%-10%) recovery if a payment default occurs.

We are also assigning a 'CCC-' issue-level rating and a '6' recovery rating to NAV's proposed subordinated convertible notes, due to mature in 2018.

The ratings reflect our assessments of the company's business risk profile as "vulnerable" and its financial risk profile as "highly leveraged".

"The rating downgrades reflect our increased skepticism regarding NAV's prospects for achieving the market shares it needs for a successful business turnaround," said credit analyst Sol Samson. The company has made slow progress over recent quarters, but we do not believe that NAV's Class 8 market share will reach 18% any time soon. Meanwhile, its medium-duty truck share has declined in recent months, prompting the company to announce plans to offer Cummins engines in its medium-duty trucks and buses. Similar to the earlier replacement of its proprietary Class 8 engines and emissions technology offerings, this strategic repositioning involves execution risks, higher costs, and the potential loss of lucrative parts sales in the future.

NAV cannot rely on a robust market in 2014-2015, either. While Standard & Poor's is not forecasting a decline in the overall truck market, neither can we rule out a slump in the medium term. The truck industry is historically cyclical and the anemic economic expectations for the U.S. would ordinarily have negative implications for both medium- and heavy-duty truck demand. (Over-the-road Class 8 truck demand is correlated to manufacturing levels, retail deliveries, and GDP; severe service truck demand is geared to construction activity.)

Given the risks and uncertainties we associate with NAV's prospects--the very reasons underlying this rating action--we believe there is potential for NAV's performance to deviate significantly from our forecast. Nonetheless, we envision a "base-case" scenario for fiscal-years 2014 and 2015 where revenues grow to $12 billion-$12.5 billion and losses narrow significantly in 2014 and are close to breakeven in 2015. NAV's debt burden is substantial in any event and potentially unsustainable. Assuming that NAV can generate $500 million of EBITDA in fiscal-year 2014, its debt leverage would be more than 10x (excluding finance-related debt, including operating lease and retiree liabilities).

The developing outlook reflects our view that NAV's cash liquidity will not last indefinitely, although it is sufficient for several quarters.

We could lower our ratings in the near term if any additional setbacks occur to the turnaround efforts--and jeopardized the payment of NAV's upcoming maturity. It would be critical if NAV's liquidity deteriorated more rapidly than we currently anticipate--for example, due to loss of trade credit.

We could revise our corporate credit rating to 'B-' within roughly 12 months
if NAV:

* Amasses sufficient new liquidity to repay its upcoming maturity;
* Demonstrates that it has recaptured the market share that it needs for viability (in our view, that equates to 18% for Class 8); and
* Restores even nominal profitability--and starts to generate free cash flow--and makes meaningful progress in reducing its debt burden and improving credit.


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