Fitch Ratings has upgraded the Issuer Default Ratings (IDR) of
Fitch has withdrawn the long-term issue ratings as a large portion of outstanding debt, including all debt rated by Fitch, has been repaid in association with the acquisition.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
Fitch is withdrawing the ratings of NAV,
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
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
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
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
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,
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
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
Asset quality metrics at NFC remained strong in 2021, with zero net charge offs in the second quarter ended
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
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 '
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 '
LIQUIDITY AND DEBT STRUCTURE
Adequate Liquidity: Manufacturing cash at
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
ISSUER PROFILE
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
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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