Fitch Ratings expects to assign a 'BB- 'rating to Navistar International Corporation's (NAV) new $1 billion senior unsecured 12-year notes and a 'B' rating to NAV's $500 million senior subordinated convertible five-year notes. Proceeds will be used to pay off the entire amount outstanding under NAV's senior unsecured credit facility ($1.33 billion as of July 31, 2009), increase liquidity, and support general corporate purposes. The rating on the subordinated convertible notes is notched two levels below NAV's Issuer Default Rating (IDR) due to contractual subordination and Fitch's estimate of recoveries in a distressed scenario. Fitch plans to withdraw its ratings on NAV's senior unsecured bank facility with the cancellation of the facility.
Fitch has also affirmed the IDRs and Senior unsecured bank facility ratings for NAV and Navistar Financial Corp. (NFC) as follows:
Navistar International Corp.
--IDR at 'BB-';
--Senior unsecured bank facility at 'BB-'.
Navistar Financial Corp.
--IDR at 'BB-';
--Senior unsecured bank lines at 'BB-'.
The Rating Outlook remains Negative.
The ratings cover approximately $1.8 billion of outstanding debt at NAV and $3.4 billion of outstanding debt at NFC as of July 31, 2009. Due to the close operating relationship and importance to the parent, NFC's ratings are directly linked to those of the ultimate parent. The relationship is governed by an agreement, referenced in the NFC credit agreement, that requires Navistar, Inc. and NAV to own 100% of NFC's equity at all times.
The ratings reflect NAV's solid credit metrics for the 'BB-' category, adequate liquidity position, U.S. and Canada market share leadership in Class 6-8 trucks and school buses, competitive engine portfolio, strong North American distribution network, significant military business, and potential future success with several business initiatives including the Mahindra & Mahindra joint venture, Caterpillar (CAT) joint venture, and Monaco RV business.
Credit concerns include continued weakness in the truck market, significant pension liabilities, future cash pension contributions, material accounting weaknesses, and several concerns related to NFC, as discussed below. NAV also remains geographically dependent on North America, with approximately 92% of its 2008 fiscal-year revenue from this region. Fitch is also concerned about the possibility of restructuring costs related to the currently idled Chatham, Ontario plant.
The Negative Outlook is based primarily on concerns at NFC, particularly $1.9 billion of refinancing risk in 2010 and capitalization levels. Fitch also expects NFC's operating performance and asset quality to remain pressured. The risk of continued weak truck and engine markets also contributes to the Negative Outlook.
NAV stated in its Prospectus Supplement that it has 'engaged in discussions with multiple parties regarding a strategic alliance involving NFC that would ensure funding and liquidity, reduce the need for capital, and reduce overall leverage at NFC.' While no agreement has been announced or completed, Fitch believes that such a strategic arrangement could address many of the credit concerns regarding NFC, and Fitch would likely consider such an arrangement to be a positive factor for the Outlook and/or ratings.
NFC has renewed and is pursuing financing transactions to improve its liquidity position and extend near-term maturities. NFC renewed a dealer floorplan funding facility and extended its retail receivables securitization facility. NFC is currently in the early stages of renewing its bank facilities and planning a retail securitization or asset sale in excess of $300 million.
At the end of NAV's latest third quarter (ending July 31, 2009), Fitch calculates NAV (excluding NFC) had a liquidity position of approximately $875 million, consisting of $751 million of cash and equivalents and $341 million in aggregate credit facility capacity, less $217 million of current maturities of long-term debt. NAV's $1.7 billion of credit facilities consist of a $200 million secured asset-backed revolving credit facility, unsecured $1.1 billion term loan and unsecured $400 million synthetic revolving credit facility. NAV's $200 million secured asset-backed credit facility due June 2012 has a $10 million liquidity block against it and has never been borrowed against.
Although Fitch considers NAV's credit metrics to be solid for its current rating, the metrics have weakened this year and Fitch expects them to decline further in 2010 before strengthening again in the 2011 timeframe. NAV's latest 12-months (LTM) debt-to-EBITDA ratio was 2.4 times (x) compared to 1.7x in fiscal 2008 (but still much better than NAV's fiscal 2007, when leverage was 5.8x). The company's LTM EBITDA-to-interest coverage decreased to 6.4x versus 7.2x in fiscal 2008. NAV's LTM EBITDA margins have contracted to 6.3% compared to 7.7% for fiscal 2008. The company's LTM EBITDA was $743 million compared to $1.1 billion in fiscal 2008. NAV's debt as of July 31, 2009 was $1.806 billion or about flat versus fiscal 2008 when it was $1.834 billion.
The continued weak U.S. and Canadian medium- and heavy-truck market has pressured NAV's manufacturing operations this year but they remain profitable and continue to generate positive cash flow in part due to NAV's ability to grow market share in each of its major truck segments. Fitch expects a modest rebound in industry truck sales in 2010 but believes margins and positive free cash flow will contract at NAV due to less U.S. military business, the loss of most of its business with Ford, and increased competitive pressures related to the emissions standard change.
NFC has shown improved profitability metrics, as the company reported net income of $21.8 million for the nine months ended July 31, 2009 versus a loss of $13.2 million for the comparable period in 2008. Improved profitability was driven by reduced borrowing costs, as weighted average interest rates were 2.3% for the nine months ended July 31, 2009 versus 4.8% in 2008. Fitch expects future earnings to be lower versus historical returns because credit losses will remain relatively high due to the economic environment. Asset quality continues to show deterioration in 2009 and delinquencies rose in conjunction with the general weakness in the economy and reduced demand for trucks. The increase in fuel prices, particularly diesel fuel, had a significant adverse impact on the owner/operator segment of the trucking industry.
Fitch sees increasing risk at NFC, mainly due to weak capital levels, although leverage did show improvement to 9.63x at July 31, 2009 from 13.48x at Oct. 31, 2008. Given the large retained interest of $220 million, or 70% of equity, and changed market dynamics for such assets, NFC might need to write-down its retained interest, placing further pressure on capital levels. Due to weak levels of capital at NFC, Fitch views capital levels in conjunction with NAV for the current rating.
Fitch expects NAV will be able to end the current fiscal year with cash balances at least as high as at the end of fiscal 2008, and the company should be able to generate positive free cash flow even with the significant industry downturn and increases in capital expenditures. The $250 million to $350 million capital expenditures NAV is forecasting is higher than NAV's last fiscal year in part to prepare for the 2010 emission standards change. Other uses of cash in NAV's current fiscal year include pension contributions of $37 million, a value that will balloon in 2010, and restructuring cash charges of at least $65 million related to the closing of its Indianapolis plants. Fitch believes restructuring cash costs could increase depending on the outcome of the Chatham, Ontario decision.
Fitch estimates cash interest expense will be approximately $105 million this year. NAV expects its professional fees to decline to between $30 million and $40 million this year, a significant improvement from 2008. Fitch expects NAV's investments in its Mahindra & Mahindra and CAT joint ventures this year to be substantial as the company launches its first joint products with Mahindra & Mahindra and possibly with CAT by year-end. NAV also acquired certain assets of Monaco Coach for $47 million this year and could invest in a joint venture with Modec Ltd by 2009 fiscal year end.
In the first nine months of NAV's fiscal year 2009, manufacturing revenue has declined 23.8% and manufacturing segment profit margin has contracted to 7.0% from 7.8% (before eliminations). The company expects sales for its entire fiscal year to decline 22% and for its manufacturing segment profit to contract 20.7% (or 36% if the $175 million positive impact from the Ford settlement is eliminated). Sales pressures in 2009 are driven by the depressed North American truck industry, which is experiencing the lowest industry volume in decades, a $1.2 billion/33% contraction in military business this year, and engines sales that are expected to be off 18%. Supporting margins this year has been a shift of high-margin Class 8 trucks that are built in Mexico versus Canada, reduction of low-margin Ford engine business, still substantial military business, expansion of NAV's high-margin parts business and a 13% reduction in SG&A costs. The end of 2009 could see a positive improvement in industry sales related to pre-buying ahead of the 2010 emissions standards change, but this will have little impact on NAV's 2009 results.
Fitch calculates NAV's pension fund plan asset balance lost 36.6% of its value in fiscal 2008, leading to year-end funded status of 74.8% ($763 million underfunded) compared with 94.8% in 2007. NAV contributed $108 million to its pension fund in 2008 and estimates contributions in 2009 will be $37 million. Based on current forecasts NAV estimates that it may need to contribute approximately $150 million in 2010 and approximately $300 million per year in 2011 and 2012 to comply with existing U.S. pension plan funding regulations. At Oct. 31, 2008, equities accounted for 74% of NAV's pension plan assets including 8% in the company's own stock, exposing NAV to additional market and diversification risk.
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Contacts:
Fitch Ratings
Nathan Spunt, 212-908-0202, New York
Craig
Fraser, 212-908-0310, New York (Navistar)
Peter Shimkus,
312-368-2063, Chicago
William Artz, 312-368-2083, Chicago (Navistar
Financial)
or
Media Relations:
Cindy Stoller,
212-908-0526, New York
Email: cindy.stoller@fitchratings.com
