Fitch Ratings has upgraded the Issuer Default Ratings (IDR) of Navistar International Corporation (NAV), Navistar, Inc. and Navistar Financial Corporation (NFC) to 'BBB-' from 'B-' and withdrawn the ratings following TRATON SE's (TRATON; not publicly rated) acquisition of NAV on July 1, 2021.

Fitch has withdrawn the long-term issue ratings as a large portion of outstanding debt, including all debt rated by Fitch, has been repaid in association with the acquisition. NFC has secured debt that will remain outstanding including dealer floorplan securitizations rated by Fitch's structured finance group, but the ratings for these securitizations do not depend on Fitch's ratings for NAV or NFC.

The ratings have been removed from Rating Watch Positive (RWP), which incorporated Fitch's expectation that TRATON's acquisition of NAV was likely to lead to an upgrade of NAV's ratings. NAV is also removed from Under Criteria Observation (UCO), which was implemented after Fitch finalized its Corporates Recovery Ratings and Instrument Ratings Criteria in April 2021. The debt affected by the UCO has been repaid.

Fitch is withdrawing the ratings of NAV, Navistar, Inc. and NFC as NAV is undergoing a reorganization. Accordingly, Fitch will no longer provide Ratings or analytical coverage for NAV, Navistar, Inc. or NFC.

KEY RATING DRIVERS

Rating Upgrade: The upgrade of NAV's IDR incorporates a strong linkage with TRATON, which has a stronger credit profile than NAV. The linkage is supported by TRATON's significant investment in NAV and the strategic importance of the acquisition, which provides TRATON with a meaningful entry into the commercial vehicle market in North America. In addition, the acquisition should provide additional opportunities to realize cost and other synergies initiated under an existing alliance and provide opportunities to further align operations and investment spending for engines and other technology.

These considerations are offset by the absence of formal support arrangements between TRATON and NAV, although Fitch believes TRATON has the capacity to provide operating and financial support to NAV as needed.

TRATON Credit Profile: TRATON is controlled by Volkswagen AG (BBB+/Positive), which owns approximately 90% of TRATON. TRATON consists of several commercial truck operations including Scania, MAN and other businesses, and the acquisition of NAV makes TRATON the second largest global truck and bus manufacturer. Fitch believes TRATON is well-positioned around electrification, automation and connectivity technology that should create synergies with NAV's ongoing investments and product development.

The transaction increases TRATON's leverage due to debt incurred to fund the transaction, but Fitch expects TRATON will strengthen its balance sheet over the long term. TRATON's EBIT margin in 2021 is improving toward pre-pandemic levels due to a recovery in demand, an increase in service revenue, and cost synergies among TRATON's brands. Margins are constrained by weak performance at the MAN unit which has implemented restructuring actions. TRATON's FCF after dividends is expected to return to a solidly positive level in 2021.

NAV's Credit Profile: NAV's credit profile, excluding the impact of the acquisition by TRATON, is weak, which reflects negative FCF and a limited portfolio of Navistar-produced engines, which constrains after-market revenue and margins. However, Fitch expects NAV to benefit from its operating alignment and synergies with TRATON and from improving conditions in the commercial vehicle market. The pandemic contributed to a 34% decline in revenue in fiscal 2020, but the current demand recovery should lead to significantly improved revenue and margins compared with low levels in 2020. Orders have recovered solidly since mid-2020, but a full recovery could be extended, partly due to supply chain constraints.

Negative FCF: Fitch estimates FCF will remain negative in 2021 before becoming slightly positive in 2022. FCF in 2021 includes the impact of an increase in capital expenditures to expand manufacturing capacity, the possible payment of litigation charges recognized in 2020 and early 2021, a reversal of temporary cost cuts made in 2020 in order to conserve cash, and pension contributions. Legislation passed in March 2021 is expected to reduce NAV's pension contributions through 2024 compared to previous estimates. Net pension liabilities at the end of fiscal 2020 were $1.4 billion (57% funded).

Rating Concerns: Other rating concerns include the highly cyclical nature of NAV's commercial truck markets and low share of proprietary engines in NAV trucks although Fitch expects the share to increase over time. Litigation risk includes claims associated with NAV's legacy EGR engines, Navistar Defense, and post-retirement benefits under a 1993 settlement agreement. NAV recognized charges in 2020 and the first half of 2021, totaling more than $400 million associated with these claims. These concerns are partly offset by NAV's cash balance, competitive product line, and operating and cost synergies associated with the TRATON alliance.

Captive Support: Under its criteria for rating non-financial corporates, Fitch calculates an appropriate debt/equity ratio of 3.0x at financial services based on asset quality, funding and liquidity. Actual debt/equity at financial services as measured by Fitch, excluding intangible assets, was 2.9x as of April 30, 2021. As a result, no adjustments to debt are calculated by Fitch with respect to support for NAV's Financial Services operations.

Navistar Financial Corporation

The upgrade and simultaneous withdrawal of NFC's ratings reflects Fitch's belief that NFC is core to NAV's franchise, which is supported by shared branding with NAV and the close operating relationship with and importance to NAV, as substantially all of NFC's business is connected to the financing of dealer inventory and trucks sold by NAV's dealers. The relationship between NAV and NFC is formally governed by the Master Intercompany Agreement (MIA) requiring NAV to own 100% of NFC's equity at all times. It is unclear whether the MIA will remain in place post-merger and in what form. However, Fitch expects that TRATON will provide implicit support to NAV and by extension, to NFC, even though there are no formal agreements in place.

Beyond these support-driven considerations, Fitch also considers NFC's consistent operating performance and solid asset quality. The company has no recourse debt outstanding as of July 1, 2021 given the repayment of the senior secured credit facility.

Asset quality metrics at NFC remained strong in 2021, with zero net charge offs in the second quarter ended April 30, 2021 (2Q21) and low levels of delinquencies as NFC has been focused on the wholesale portfolio, which, has historically experienced lower loss rates compared to the retail portfolio. In 2Q21, NFC's net finance receivables balances remained relatively flat compared with FYE20, reflecting a stabilization in dealer inventory levels. Fitch expects asset quality will remain relatively stable over the medium term as the impacts of the pandemic subside.

NFC's profitability metrics continued to deteriorate in 2Q21, with revenue decreasing compared with the prior year, primarily as a result of a decline in average portfolio balances yoy, lower interest rates charged to customers and reduced fees charged to NAV. During 2Q21, NFC's pretax ROAA was consistent with Fitch's benchmark range for finance and leasing companies with an 'a' operating environment score. Fitch expects NFC's operating performance to remain weaker in the near term given slower loan and lease growth.

NFC's leverage (debt to tangible equity) was consistent with Fitch's benchmark score of 'bbb' as of 2Q21. Leverage was higher at 2Q21 compared with FY20, given higher debt balances and a slight reduction in equity. Proforma for the pay-off of the bank credit facility post quarter-end, leverage declined and was at the lower end of Fitch's benchmark score of 'bbb'. If NFC's loan to its parent were instead classified as a dividend, thus reducing NFC equity, leverage would have been in the 'bb' benchmark range (pro forma for the bank facility repayment), but lower than a year ago. Fitch believes that the company's leverage, adjusted for the intercompany loan, is in-line with that of other captive finance peers in Fitch's rated universe. Fitch expects adjusted leverage to remain at-or-near current levels as NAV continues to use NFC's balance sheet to enhance liquidity at the parent company.

NFC's funding profile is fully secured, which compares unfavorably with other captive finance companies. Secured debt is comprised of warehouse facilities and asset-backed securitization issuances. Fitch believes NFC's secured funding profile and lack of an unencumbered asset pool, reduces its funding flexibility relative to higher rated firms, particularly in times of market stress.

DERIVATION SUMMARY

NAV has a weaker financial profile, prior to the acquisition by TRATON, including higher leverage and lower FCF than other global heavy-duty truck original equipment manufacturers. It also has a more concentrated geographic exposure and smaller scale than some large global peers including Daimler Trucks North America LLC, a subsidiary of Daimler AG; AB Volvo (BBB+/Stable); and PACCAR Inc. (not publicly rated) although NAV has a broad product line of heavy and medium duty trucks and school buses within its primary market in North America. These concerns are mitigated by NAV's position as part of a larger global company following the acquisition by TRATON, which will increase opportunities to realize synergies with TRATON's MAN SE and Scania AB units.

KEY ASSUMPTIONS

A recovery in NAV's heavy-duty truck market contributes to a sales increase of more than 15% in 2021 and a further improvement in 2022 although revenue remains below the cyclical peak in fiscal 2019;

EBITDA margins improve by more than 200 bps over the next two years from 5.8% in 2020 as calculated by Fitch;

Operating and cost synergies with TRATON contribute to a broader product portfolio and higher margins;

External debt at NAV's manufacturing business is replaced by an intercompany liability owed to TRATON;

NAV regains market share following a decline in 2020 which partly reflected NAV's relatively high exposure to rental and leasing customers;

FCF remains negative in 2021 and becomes slightly positive in 2022.

RATING SENSITIVITIES

Rating Sensitivities are not applicable as the ratings have been withdrawn.

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.

LIQUIDITY AND DEBT STRUCTURE

Adequate Liquidity: Manufacturing cash at April 30, 2021 was $1.2 billion excluding restricted cash. NAV's external debt of approximately $3.5 billion was repaid upon the acquisition by TRATON although Fitch assumes NAV will have liabilities to TRATON for a similar amount. The elimination of external debt terms will reduce constraints on NAV's financial flexibility. Debt was $2 billion at the financial services segment, the majority of which is at NFC. Low leverage at Navistar Financial Corporation (NFC) mitigates the risk of support being required from NAV.

Navistar Financial Corporation

Fitch believes NFC's current liquidity profile is adequate given available resources and the company's continued ability to securitize originated assets in the current market environment. At 2Q21, NFC had $21.4 million of unrestricted cash and $1.1 billion of asset-backed and non-recourse debt outstanding.

ISSUER PROFILE

Navistar produces commercial vehicles including heavy- and medium-duty trucks and school buses as well as Class 4 and 5 trucks, primarily for the North America market, which are sold through a large dealer network. NAV also provides parts and operates a financial services business that offers wholesale, retail and lease financing.

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The ratings for Navistar incorporate Fitch's assessment of the credit profile for TRATON as well as the strength of the parent subsidiary linkage between TRATON and NAV. A change in this assessment would result in a change to the ratings for Navistar.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg

RATING ACTIONSENTITY/DEBT	RATING		PRIOR
Navistar International Corporation	LT IDR	BBB- 	Upgrade		B-
	LT IDR	WD 	Withdrawn		B-

senior unsecured

LT	WD 	Withdrawn		CCC

senior unsecured

LT	WD 	Withdrawn		CCC

Senior Secured 3rd Lien

	LT	WD 	Withdrawn		BB-
Navistar, Inc.	LT IDR	BBB- 	Upgrade		B-
	LT IDR	WD 	Withdrawn		B-

senior secured

	LT	WD 	Withdrawn		BB-
Navistar Financial Corp.	LT IDR	BBB- 	Upgrade		B-
	LT IDR	WD 	Withdrawn		B-

senior secured

LT	WD 	Withdrawn		B

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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