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TEXT-Fitch puts Navistar 'BB' rating on watch negative
June 8, 2012 / 7:26 PM / 5 years ago

TEXT-Fitch puts Navistar 'BB' rating on watch negative

June 8 - Fitch Ratings has placed the 'BB' IDR for Navistar International
Corporation (NAV) and Navistar Financial Corporation (NFC) on Rating
Watch Negative. A full rating list is shown below.	
	
The Negative Rating Watch reflects:	
	
--Concerns about recent losses;	
--NAV's future financial performance; and	
--Its competitive position in medium and heavy duty truck markets.	
	
Warranty costs associated with new engines were higher than expected during the
first half of fiscal 2012. In addition, engine certification by the
Environmental Protection Agency (EPA) pertaining to NAV's EGR-only nitrogen
oxide emissions continues to be delayed. Connected to these concerns is NAV's
market share, which has not returned to higher levels as expected. Debt/EBITDA
has increased materially from a level of 2.4x at Oct. 31, 2011 and could remain
elevated compared to recent levels.	
	
NAV's financial performance typically improves in the second half of its fiscal
year. However, Fitch believes NAV will be challenged to achieve profitability
for the full year absent a material turnaround in warranty costs and prompt
engine certification by the EPA. Margins have also declined due to the recent
product mix. This includes a higher proportion of heavy duty trucks and sales to
large customers that generate lower margins than other revenue types. Liquidity
is adequate, but could become a concern for NAV if:	
	
--Performance doesn't improve; or	
--If temporary cash requirements, such as higher working capital requirements
for used-truck inventories, do not reverse.	
	
Other concerns include:	
	
--Lower military revenue and execution risks related to expansion in overseas
markets;	
--Discussions with the EPA; and	
--The realignment and integration of certain truck and engine operations.	
	
NAV has large pension obligations which were underfunded by $1.8 billion
(approximately 57% funded) at the end of 2011. NAV expects to contribute $190
million to the plans in 2012.	
	
Potential positive developments that could mitigate rating concerns include:	
	
--Indications that quality has improved on recently produced engines;	
--Future profitable sales of used trucks which would reduce inventories; and	
--EPA engine certification.	
	
Due to NFC's close operating relationship and importance to the parent, its
ratings are directly linked to those of the ultimate parent. The relationship is
governed by the Master Intercompany Agreement. There is a requirement referenced
in the NFC credit agreement requiring Navistar, Inc. or NAV to own 100% of NFC's
equity at all times. NFC's financial performance is generally in line with
Fitch's expectations.	
	
Fitch expects to resolve the Negative Rating Watch in the near term following a
meeting with management and further review of NAV's performance and plans.	
	
Fitch's ratings cover approximately $2 billion of debt at NAV and $2.5 billion
of outstanding debt at its Financial Services segment, the majority of which is
at NFC, as of April 30, 2012.	
	
Fitch has placed the following ratings for NAV and NFC on Rating Watch Negative:	
	
Navistar International Corporation	
--Long-term IDR 'BB';	
--Senior unsecured notes 'BB';	
	
	
--Senior subordinated notes 'B+'.	
	
Cook County, Illinois	
--Recovery zone revenue facility bonds (Navistar International Corporation
Project) series 2010 'BB';	
	
Illinois Finance Authority (IFA)	
--Recovery zone revenue facility bonds (Navistar International Corporation
Project) series 2010 'BB';	
	
Navistar Financial Corporation	
--Long-term IDR 'BB'.	
--Senior unsecured bank credit facilities 'BB'.	
	
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.	
	
Applicable Criteria and Related Research:	
--'Corporate Rating Methodology' (Aug. 12, 2011);	
--'Finance and Leasing Companies Criteria' (Dec.12, 2011);	
--'Rating Linkages in Nonbank Financial Subsidiary Relationships' (Nov. 29,
2011);	
--'Global Financial Institutions Rating Criteria' (Aug. 16, 2011).	
	
Applicable Criteria and Related Research:	
Global Financial Institutions Rating Criteria	
Finance and Leasing Companies Criteria	
Corporate Rating Methodology	
Rating Linkages in Nonbank Financial Subsidiary Relationships

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