Taken alone, the downgrading of Navistar International Corp.’s (NYSE: NAV) credit rating by Standard & Poor’s does not truly reflect the state of the truck and engine maker’s business health, according to what two Navistar spokespersons have told FleetOwner.
As reported by business-news outlets, credit-rating agency Standard & Poor’s recently made these negative changes to its judgment of Navistar’s creditworthiness:
- Lowered its long-term corporate credit rating CCC+ from B-.
- Lowered its issue rating on Navistar’s secured loan to B from B+.
- Lowered its corporate credit rating on Navistar Financial Corp. to CCC+ from B-.
- Lowered its issue rating on Navistar’s senior unsecured notes as well as its subordinated debt to CCC- from CCC.
- Assigned a CCC- issue-level rating to Navistar’s proposed subordinated convertible notes— which were announced by the OEM on Monday and are due to mature in 2018.
A piece by financial-news analysis service Streetinsider.com, posted on Monday. quotes S&P credit analyst Sol Samson as saying the downgrades reflect the rating agency’s current assessments of Navistar’s business risk profile as "vulnerable" and its financial risk profile as "highly leveraged.”
Samson defended the rating downgrades as reflective of S&P’s “increased skepticism regarding Navistar's prospects for achieving the market shares it needs for a successful business turnaround," according to Streetinsider.com.
The analyst also indicated, per the Streetinsider.com piece, that S&P could lower Navistar’s ratings in the near term “if any additional setbacks occur to the turnaround efforts”… [but S&P] “could revise our corporate credit rating to 'B-' within roughly 12 months” if Navistar achieves certain positive milestones, including restoring “even nominal profitability.”
Asked by FleetOwner for Navistar’s reaction to the S&P action, Steve Schrier, senior manager of corporate communications, took issue with that characterization. “I would encourage anyone to look at [credit-rating agencies] Moody’s and Fitch, both of which have maintained their rating on Navistar.”
On Monday, Moody’s issued a news release stating that it has “affirmed the ratings of Navistar International Corp., including the B3 Corporate Family Rating (CFR) and B3-PD Probability of Default Rating (PDR), and assigned a Caa2 rating to the company's offering of $200 million of senior subordinated convertible notes.” The firm added that the rating outlook for the OEM is stable.
“The ratings reflect our expectation that Navistar's successful incorporation of Cummins engines throughout its product lineup will enable the company to regain lost market share, and that progress in addressing component failures in 2010 vintage-engines will significantly reduce warranty expenses,” explained Moody’s.
“These initiatives, combined with various restructuring and cost-cutting programs completed during 2013, should significantly reduce the pace of cash consumption during 2014, help the company strengthen its US competitive position, and significantly improve earnings,” the ratings firm continued. “The stable outlook reflects our expectation that Navistar's operating performance and all of its key credit metrics will show steady improvement through 2014.”
“If S&P’s analysis was made before our announcement [yesterday] on our most recent truck-order results,” Elissa Maurer, senior manager of external communications, told FleetOwner, “then it doesn’t reflect that impact.”
In that news release, Navistar reported that it took in nearly 5,900 Class 6-8 truck orders in September—marking the OEM’s highest order receipt month since December 2011. The September orders included more than 2,100 medium-duty trucks powered by the Cummins ISB engine.
Navistar noted that it built the first “saleable” International DuraStar trucks and IC Bus CE Series school buses with Cummins ISB engines in September and that it is “on track” to begin customer deliveries of DuraStar units in December and CE Series buses in late January.
“September orders marked Navistar's highest monthly order intake for Class 6/7 vehicles in almost two years,” stated Bill Kozek, Navistar president, North America Truck & Parts, “which strengthens our belief that the ISB will be the catalyst for improving our medium-duty business.
“Many of our customers asked us to add the ISB to our lineup, and we listened,” he added. “With more than 2,100 orders in the first 30 days, we're optimistic this will be a winning combination in the marketplace."
According to Maurer, the September order results are expected to translate into retail sales and are “consistent with what Navistar has said about the industry’s order activity for the second half, compared to the choppiness seen in the first half.”
As to Samson’s remark, as quoted by Streetinsider.com, that Navistar began offering Cummins engines in its medium-duty trucks and buses because “its medium-duty truck share has declined in recent months,” Maurer gave a specific response.
She told FleetOwner that the OEM had opted to make those diesels available because “our customers asked us to pair the Cummins ISB SCR engine with our medium-duty platform. The ISB became available in our vehicles on Sept. 3 and the fact that we recorded over 2,100 orders for them in a month’s time demonstrates we responded to that customer demand.”
Maurer also pointed out that the OEM has previously stated that it will "announce the next steps of its comprehensive mid-range SCR engine strategy at a later date. In the meantime, Navistar will continue to offer EGR-only versions of its mid-range engines utilizing its medium-duty emissions credits.”
“We are making significant progress in our drive to deliver on our turnaround plan,” Schrier told FleetOwner.
“We are doing what we said we would in terms of improving our liquidity and cutting structural costs," he continued. "The next piece will be about making progress on increasing our market share.”