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.