- Illinois-based truckmaker Navistar International Corp. (NAV) continues to post poor results–and we believe that the risks to its turnaround have increased. While still struggling to rebuild its Class 8 heavy-duty truck franchise, NAV also faces a challenge with medium-duty trucks. The company will offer Cummins engines in its medium-duty trucks and buses, following the identification of medium-duty engine quality issues and significantly lower order levels.
- The company’s liquidity position is weakened by continuing cash outflow from operations and the $570 million maturity of convertible debt in October 2014. We expect NAV to proactively address its liquidity position–as it has done in the past 18 months–by raising additional capital. Today’s offering of $200 million convertible notes is one such positive step.
- We are lowering our long-term corporate credit rating on NAV to ‘CCC+’ from ‘B-‘. We are also lowering our issue ratings on NAV’s senior unsecured debt and subordinated debt to ‘CCC-‘ from ‘CCC’ and on Navistar Inc.’s secured loan to ‘B’ from ‘B+’.
- We are also assigning a ‘CCC-‘ issue-level rating and a ‘6’ recovery rating to NAV’s proposed 144A issue of subordinated convertible notes.
- The developing outlook reflects our view that NAV will continue to generate losses and experience cash outflows in the near term, which will exacerbate its highly-leveraged financial risk profile and potentially diminish liquidity in the medium term. Still, NAV is making some progress with growing Class 8 trucks–and may eventually succeed in its turnaround efforts.
Standard & Poor’s Ratings Services today lowered its long-term corporate credit rating on Illinois-based truckmaker Navistar International Corp. (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.
RELATED CRITERIA AND RESEARCH
- Criteria For Assigning ‘CCC+’, ‘CCC’, ‘CCC-‘, And ‘CC’ Ratings, Oct. 1, 2012
- Methodology: Business Risk/Financial Risk Matrix Expanded, Sept. 18, 2012
- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011
- Key Credit Factors: Criteria For Rating The Global Automaker Industry, Oct. 1, 2010
- Criteria Guidelines For Recovery Ratings On Global Industrials Issuers’ Speculative-Grade Debt, Aug. 10, 2009
- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
- 2008 Corporate Criteria: Rating Each Issue, April 15, 2008
- 2008 Corporate Criteria: Ratios And Adjustments, April 15, 2008
Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at www.spcapitaliq.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.
