Navistar to Offer $200 Million in Notes, Credit Rating Lowered by S&P

UPDATED--Navistar International has announced its latest financial move to prop up its money-losing operations, but a major credit rating agency doesn't seem that impressed, despite truck order numbers increasing. 

It plans to issue $200 million of senior subordinated convertible notes due 2018 in a private offering. In addition, the company will grant the initial purchasers an option to purchase up to an additional $30 million of convertible notes.

It plans to use the net proceeds from the offering, together with $270 million of intercompany borrowings from its financing subsidiary, for general corporate purposes, which may include funding capital expenditures and repurchases of a portion of its outstanding notes due in 2014.

This follows Navistar International last month announcing it had a fiscal third quarter net loss of $247 million, compared to third quarter 2012 net income of $84 million. 

This week Navistar says it secured nearly 5,900 Class 6-8 truck orders in September, making it the company’s highest order receipt month since December 2011. The company’s orders for the month include more than 2,100 medium-duty trucks with the Cummins ISB 6.7 liter engine.

On September 3, Navistar announced it would add the Cummins ISB to its engine offerings to allow the company to get to market faster with medium-duty SCR vehicles. Navistar built the first saleable International DuraStar trucks and IC Bus CE Series school buses with Cummins ISB engines in September. It is on track to begin customer deliveries of DuraStar units in December 2013 and CE Series school buses in late-January 2014.

Navistar Class 6/7 order share is estimated at 31.7% for September, up from 18.8% in August. For Class 8, order share is an estimated 17.4% for September, up from 16.6% in August.

The company has received more than 11,500 orders for Cummins ISX engines since December 1, 2012, and more than 6,000 orders for MaxxForce 13 engines with SCR since March 1, 2013. 

Meantime, Standard & Poor's Ratings Services lowered its long-term corporate credit rating on Illinois-based truckmaker to CCC+ from B-.

It also lowered the rating on Navistar's secured loan to B from 'B+. The recovery rating on the loan indicates a expectation of strong recovery if a payment default occurs.

In addition, S&P lowered the corporate credit rating on Navistar Financial to CCC+ from B-, the rating on Navistar’s senior unsecured notes, as well as its subordinated debt, to 'CCC-' from 'CCC'. The recovery ratings on these issues are unchanged, indicating an expectation of negligible recovery if a payment default occurs.

S&P also assigned a CCC- issue-level rating and the same recovery rating to Navistar's proposed subordinated convertible notes announced on Monday.

“The ratings reflect our assessments of the company's business risk profile as vulnerable and its financial risk profile as highly leveraged,” said Sol Samson, S&P credit analyst in an interview with StreetInsider.com. "The rating downgrades reflect our increased skepticism regarding Navistar's prospects for achieving the market shares it needs for a successful business turnaround."

S&P notes the company has made slow progress over recent quarters, but does not believe that Navistar Class 8 market share will reach 18% any time soon, a level S&P feels it needs to be in much better financial position.

“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,” said Samson. “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.”

While Standard & Poor's is not forecasting a decline in the overall truck market, it notes it cannot rule out a slump in the medium term, which would hurt Navistar further.

“Given the risks and uncertainties we associate with Navistar’s prospects--the very reasons underlying this rating action--we believe there is potential for Navistar’s performance to deviate significantly from our forecast,” said Samson. “Nonetheless, we envision a 'base-case' scenario for fiscal-years 2014 and 2015 where revenues grow to $12 billion to $12.5 billion and losses narrow significantly in 2014 and are close to breakeven in 2015.”

He notes Navistar’s debt burden is substantial in any event and is “potentially unsustainable.” The developing outlook he said reflects S&P’s view that Navistar’s cash liquidity will not last indefinitely, although it is sufficient for several quarters.

Salomon says S&P could lower its ratings in the near term if any additional setbacks occur to the turnaround efforts, but could also revise its corporate credit rating to 'B-' within roughly 12 months if Navistar meets certain conditions.

Update adds order numbers released on October 8.