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TEXT-S&P cuts Navistar International rating to 'B'
Overview -- Truck manufacturer Navistar International Corp. revised its product strategy after its in-cylinder emissions control technology failed EPA engine certification. -- We are skeptical about the company's prospects for profitability in the near term. -- We are downgrading Navistar to 'B' from 'B+' and removing our ratings from CreditWatch. -- The rating outlook is negative, reflecting the numerous challenges the company faces in executing its alternative business plan. Rating Action On July 9, 2012, Standard & Poor's Ratings Services lowered its ratings on Navistar International Corp., including the corporate credit rating to 'B' from 'B+'. At the same time, we removed our ratings on Navistar from CreditWatch, where we had placed them with negative implications on June 7, 2012. The rating outlook is negative. Rationale The downgrade reflects the operational and financial challenges resulting from the EPA's refusal to certify Navistar's engines with respect to emissions standards. The truck manufacturer intended its in-cylinder emissions technology to provide a competitive advantage. But without EPA approval, Navistar needed to adopt a fallback approach. Its engines will now incorporate both its current emissions controls and the competing urea-based technology. Executing the transition involves engineering and production changes and added costs. Navistar expects that it will make some of its modified engine offerings available in early 2013; the rest will follow on an unspecified timetable. Market acceptance may be a significant challenge, in our opinion, creating difficulty for the company to recoup the added costs. Navistar's credit ratios are indicative of a highly leveraged financial profile. The company already has an equity deficit, and we estimate the ratio of debt to EBITDA (adjusted for the captive finance operation) will be about 8x. Liquidity Liquidity is less than adequate, as our criteria define this, even while Navistar's cash and credit availability are substantial in absolute terms. Year-to-date, the company has incurred large cash outflows. Total cash and marketable securities fell approximately half a billion dollars in the fiscal first half (ended April 30). Although Navistar has a historical pattern of better performance in its second half, this year may be more unpredictable because of the changes surrounding its engine offerings, previously announced inventory accumulation, and lower levels of military business. We assume that implementation of the new product strategy will require higher capital spending as well. Outlook The outlook for our rating on Navistar is negative. We consider it increasingly unlikely that Navistar can avoid a full-year operating loss (adjusted for one-time items, such as reversal of tax reserves). The issues facing the company's Class 8 trucks are compounded by declining sales of military vehicles and parts, and deteriorating medium-duty truck demand. We could lower Navistar's ratings further in several scenarios. The first is the engine strategy encountering new setbacks, because that effort is key to re-establishing profitability. Moreover, if the commercial truck recovery takes longer than we expect, we could lower the ratings as financial metrics weaken. We could also lower ratings if liquidity remains near seasonal lows or deteriorates further. The equity stakes held by two activist shareholders adds complexity, but is not a ratings consideration at this stage, especially given the level of the current ratings. Related Criteria And Research -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 -- Business Risk/Financial Risk Matrix Expanded, May 27, 2009 -- Corporate Criteria: Analytical Methodology, April 15, 2008 Ratings List Downgraded; Ratings Off Watch To From Navistar International Corp. Navistar Financial Corp. Corporate credit rating B/Negative/-- B+/Watch Neg/-- Navistar International Corp. Senior unsecured B B+/Watch Neg Recovery rating 4 4 Subordinated CCC+ B-/Watch Neg Recovery rating 6 6 Complete ratings information is available to subscribers of RatingsDirect on the Global Credit Portal at www.globalcreditportal.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column.
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