Fitch Ratings has lowered the long-term issuer default rating of
Navistar International Corporation
(
NAV
) and its subsidiary Navistar Financial Corporation (NFC) to "B+"
from "BB-." Fitch has also downgraded the rating on Navistar's
senior subordinated convertible debt to "B-" from "B" while the
rating agency remained consistent with the previous rating on
senior unsecured debt at "BB-."
The change in ratings depicts the free cash flow and liquidity
condition of the company which Fitch considers would be affected in
the near future, owing to the soaring costs associated with the
implementation of new engine strategy. In addition, the
company's low margins, large pension obligation and the execution
risks related to the engine transition are the other factors that
are concerning for the rating agency.
Navistar's net cash flow from operations was $49 million in
second-quarter 2012 (ended April 30) compared with $226 million a
year ago. The company recorded cash and cash equivalents of $400
million as of April 30, 2012, a decrease from $539 million as of
October 31, 2011.
This is for the second time within a span of 30 days that Fitch has
downgraded its rating for Navistar and NFC. Last time, the rating
service lowered the long-term issuer default rating and senior
unsecured notes rating of the company to "BB-" from "BB" and
downgraded senior subordinated notes rating to "B" from "B+."
The rating adjustments were due to a boost in warranty costs on
engines, lower margins, slow growth of Navistar's market share of
medium and heavy duty trucks in the U.S. and Canada and risks
associated with emission standard of its engines.
Fitch said that its ratings may further decline if the warranty
cost does not improve. Growth in free cash flow is needed in order
to stabilize the liquidity condition of the company. Decline in
margins due to the integration and expansion of the company
overseas will also have its unfavorable impact on the ratings.
Navistar will be incorporating SCR technology in its engines to
satisfy the 2010 U.S. emission regulations. The inclusion of the
SCR technology is driven by the delay in certification of the
company's EGR engine by the Environmental Protection Agency (EPA).
Fitch has adopted a negative outlook apprehending disruption in
truck delivery in the transition period.
Warrenville, Illinois-based Navistar manufactures and sells
commercial trucks, mid-range diesel engines, buses, military
vehicles and chassis for motor homes and step-vans. It also
provides service parts for various trucks and trailers. The company
is one of the largest truck producers along with
Daimler AG
(
DDAIF
) and
PACCAR Inc.
(
PCAR
).
Currently, Navistar retains a Zacks #5 Rank, which translates into
a short-term (1 to 3 months) Strong Sell rating. We have a
long-term (more than 6 months) Underperform recommendation on the
stock.
DAIMLER AG (DDAIF): Free Stock Analysis Report
NAVISTAR INTL (NAV): Free Stock Analysis Report
PACCAR INC (PCAR): Free Stock Analysis Report
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