Fitch Affirms Navistar's IDR at 'CCC'; Removes Negative Outlook

  Fitch Affirms Navistar's IDR at 'CCC'; Removes Negative Outlook

Business Wire

CHICAGO -- January 22, 2013

Fitch Ratings has affirmed the Issuer Default Ratings (IDR) for Navistar
International Corporation (NAV) and Navistar Financial Corporation (NFC) at
'CCC' and removed the Negative Outlook on the ratings. The removal reflects
Fitch's view that immediate concerns about liquidity have lessened, although
liquidity remains an important rating consideration as NAV implements its
selective catalytic reduction (SCR) engine strategy. Other rating concerns are
already incorporated in the 'CCC' rating. A full list of ratings is shown at
the end of this release.

NAV's manufacturing cash balances of $1.5 billion at Oct. 31, 2012 were above
the high end of the range anticipated by Fitch. The improvement resulted from
NAV's issuance of approximately $200 million of equity near the end of its
fiscal year in October, lower inventory, and the collection of defense
receivables sooner than anticipated. However, the improving liquidity trend
could reverse during the first part of fiscal 2013 due to seasonal and
one-time factors before NAV's fundamental operating performance recovers.

NAV's liquidity includes $1.5 billion of manufacturing cash and marketable
securities and a $175 million ABL facility. This level of cash should be
sufficient to offset negative FCF while NAV introduces its heavy duty diesel
(HDD) SCR engines. Fitch expects manufacturing free cash flow (FCF) to be
negative through at least the first half of fiscal 2013 due to seasonally low
FCF; possible delays in deliveries due to the depletion of emissions credits;
and expenditures related to warranties, non-conformance penalties (NCPs), and
ongoing pension contributions.

Liquidity and FCF could be pressured if industry demand for trucks does not
improve, the company's market share does not recover, or the transition to SCR
technology is delayed. Current maturities of manufacturing long term debt were
modest at $172 million as of Oct. 31, 2012, but debt maturities exceed $1.5
billion in 2014, including $570 million of 3% convertible notes. The remaining
2014 maturities could be extended if NAV pays down or refinances the majority
of the convertible notes.

NAV finalized a supply agreement with Cummins Inc. in October 2012 for SCR
engines and emissions technology. NAV's transition to SCR emissions technology
appears to be on track within the expected time frame and cost. However, it
involves execution risk related to integrating the technology with NAV's
engines, and integrating Cummins' 15-liter engine in NAV's trucks. Execution
risks are mitigated by NAV's familiarity with Cummins engines. In December
2012, NAV launched on time the ProStar with the Cummins ISX 15-liter engine,
and is scheduled to phase in 13-liter SCR engines beginning in April 2013,
followed by medium duty engines later in 2013 or 2014. NAV will require
approval by the EPA of its reconfigured emissions compliant engines.

Other rating concerns include the availability and use of emissions credits
which NAV estimates will be depleted during 2013 for its heavy HDD engines. In
addition, NAV is still working to achieve on-board diagnostics (OBD)
certification in 2013 for certain engines. As a result, there could be
occasional gaps in deliveries while NAV implements its revised engine
strategy. Such delays could slow a recovery in the company's market share, at
least temporarily. NAV's share in its traditional heavy and medium truck and
bus markets was 23% in fiscal 2012 and remains well below the peak level of
36% in 2009. Emission credits are a particular concern in 10 states that use
California Air Resources Board (CARB) standards which do not allow the use of
NCPs. There are sufficient emissions credits to support medium duty engine
sales into 2014.

EBITDA in 2012 was negative due to higher warranty costs, a decline in
military vehicle sales, lower engine sales related to truck volumes and demand
in South America, and higher material costs. Warranty expense more than
doubled in 2012 to $895 million, mostly related to complexity surrounding
engine emissions regulations. The charges included more than $400 million of
adjustments to pre-existing warranties. As NAV incorporates improvements in
newer engines, warranty expense should decline in 2013, barring additional
unexpected quality problems. However, cash charges are likely to increase in
the near term as NAV makes repairs related to accrued warranty liabilities.

Fitch estimates EBITDA could turn positive during 2013 if NAV executes its
revised engine strategy on time and begins to rebuild market share. In order
to improve its operating performance and preserve cash, NAV plans to limit
capital spending, cut back on investments associated with NAV's global
expansion, and redirect product development to its engine strategy.
Restructuring should also help control NAV's cost structure over the long
term, including workforce reductions. NAV estimates these actions will reduce
its cost structure by $175 million beginning in 2013.

Pension contributions represent a recurring use of cash, but required
contributions during the next few years should be slightly lower than
originally anticipated due to MAP-21 legislation passed in 2012. The
legislation allows a portion of required contributions to be temporarily
deferred, but the total obligation is unaffected. NAV estimates it will be
required to contribute $166 million in 2013 and at least $200 million annually
between 2014 and 2016. NAV contributed $157 million in 2012. NAV's net pension
obligations increased to $2.1 billion at the end of fiscal 2012 from $1.8
billion in 2011.

Fitch could take a positive rating action if manufacturing FCF returns toward
a sustainable breakeven level during 2013, the SCR engine strategy is
implemented on time, the company's market share begins to recover, and
earnings improve steadily.

Fitch could take a negative rating action if NAV's transition to SCR emissions
technology is delayed or requires substantial cash expenditures, or FCF and
liquidity do not begin to recover after the middle of fiscal 2013. If sales
volumes are low or margins remain pressured, FCF could be impaired, making it
difficult to fund capital expenditures, pension contributions and higher
interest expense associated with increased debt levels. In addition, five
investors have accumulated, in aggregate, more than 50% of NAV's common
shares, which introduces uncertainty about long-term operating and financial
policies. The ratings could also be negatively affected depending on the
outcome of the SEC's investigation of the company's accounting and disclosure
practices.

The Recovery Rating (RR) of '1' for Navistar Inc.'s $1 billion term loan
supports a rating of 'B', three levels above NAV's IDR, as the loan can be
expected to recover more than 90% in a distressed scenario based on a strong
collateral position. The RR '5' for NAV's senior unsecured debt results in a
rating of 'CCC-', one notch below the IDR, and reflects poor recovery
prospects in a distressed scenario. The RR '6' for the senior subordinated
convertible notes reflects a lower priority relative to NAV's senior unsecured
debt.

Fitch believes NFC is core to NAV's overall franchise, and the IDR of the
finance subsidiary is directly linked to that of its ultimate parent due to
the close operating relationship and importance to NAV, as substantially all
of NFC's business is connected to the financing of new and used trucks sold by
NAV and its dealers. The linkage also reflects the potential that, under a
stress scenario, NAV may seek to extract capital and/or unencumbered assets
from NFC. The relationship between NAV and NFC is formally governed by the
Master Intercompany Agreement. Also, there is a requirement referenced in
NFC's credit agreement requiring Navistar, Inc. or NAV to own 100% of NFC's
equity at all times.

Fitch views NFC's operating performance and overall credit metrics as neutral
to NAV's rating. NFC's performance has not changed materially compared to
Fitch's expectations, but its financial profile remains tied to NAV's
operating and financial performance. NFC's profitability declined further in
2012 due to the lower net interest margin earned from the continued reduction
of NFC's retail portfolio balance.

NFC's asset quality has remained stable, reflecting the mature retail
portfolio, which is in run-off. Charge-offs and provisioning volatility has
declined as NFC focuses on its wholesale portfolio, which historically has
experienced lower loss rates relative to the retail portfolio.

Absent material dividends to the parent, Fitch expects NFC's leverage to
improve and stay below historical levels due to reduced financing needs.
Balance sheet leverage, as measured by total debt to equity fell to a
historical low of 3x in 2012. Management believes NFC can more effectively
operate with a leverage target between 5x and 6x, which is consistent with
other Fitch-rated captives. The company may also reestablish dividends from
NFC to NAV in efforts to maintain adequate asset coverage and leverage, as
well as to enhance liquidity at NAV in the medium to longer term.

In June 2012, NFC completed a securitization of roughly $500 million and used
proceeds to repay outstanding borrowings on a previous securitization and a
portion of its revolving bank credit facility. In addition, NFC refinanced a
$750 million wholesale facility in August 2012. Fitch believes the refinancing
of NFC's debt facilities may help to mitigate potential near-term liquidity
concerns at NFC.

The RR of '5' for NFC's senior secured credit facilities support a rating of
'CCC-', one notch below the IDR, which reflects poor recovery prospects in a
distressed scenario.

As of Oct. 31, 2012, Fitch's ratings covered approximately $3 billion of debt
at NAV and $1.9 billion of outstanding debt at the Financial Services segment,
the majority of which is at NFC.

Fitch has affirmed the following ratings:

Navistar International Corporation

--Long-term IDR at 'CCC';

--Senior unsecured notes at 'CCC-'/'RR5';

--Senior subordinated notes at 'CC'/'RR6'.

Navistar, Inc.

--Long-term IDR at 'CCC';

--Senior secured bank term loan at 'B'/'RR1'.

Cook County, Illinois

--Recovery zone revenue facility bonds (Navistar International Corporation
Project) series 2010 at 'CCC-'.

Illinois Finance Authority (IFA)

--Recovery zone revenue facility bonds (Navistar International Corporation
Project) series 2010 at 'CCC-'.

Navistar Financial Corporation

--Long-term IDR at 'CCC';

--Senior secured bank credit facilities at 'CCC-'/'RR5'.

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. 8, 2012);

--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012);

--'Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers'
(Nov. 13, 2012);

--'Recovery Ratings for Financial Institutions' (Aug. 15, 2012).

Applicable Criteria and Related Research:

Corporate Rating Methodology

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686181

Recovery Ratings and Notching Criteria for Non-Financial Corporate Issuers

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693773

Recovery Ratings for Financial Institutions

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686295

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Contact:

Fitch Ratings
Primary Analyst (Navistar International Corporation)
Eric Ause, +1-312-606-2302
Senior Director
Fitch, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Sharon Bonelli, +1-212-908-0581
Managing Director
or
Primary Analyst (Navistar Financial Corporation)
Johann Juan, +1-312-368-3339
Director
or
Secondary Analyst
Katherine Hughes, +1-312-368-3123
Associate Director
or
Committee Chairperson
Nathan Flanders, +1-212-908-0827
Managing Director
or
Media Relations
Brian Bertsch, New York, +1-212-908-0549
brian.bertsch@fitchratings.com