S&P: Navistar International Corp. 'B-' Corporate Credit Rating Affirmed On Debt Refinancing
At the same time, we assigned our 'B+' issue-level rating and '1' recovery rating to the company's proposed senior secured term loan. The '1' recovery rating indicates our expectation for very high (90%-100%; rounded estimate: 95%) recovery of principal in the event of a payment default.
Additionally, we raised our issue-level rating on the company's $135 million recovery zone facility revenue bonds due 2040 (issued by the Illinois Finance Authority) and $90 million recovery zone facility revenue bonds due 2040 (issued by the County of Cook, Illinois) to 'B+' from 'CCC+' and revised the recovery rating on the bonds to '1' from '5'. The '1' recovery rating indicates our expectation for very high (90%-100%; rounded estimate: 95%) recovery of principal in the event of a payment default.
These rating actions follow Navistar's announcement that it plans to refinance its existing term loan and unsecured notes, which we expect will be leverage neutral. We raised our issue-level rating and revised our recovery rating on the company's recovery zone facility revenue bonds to reflect its proposed amendment to the credit agreement, which would grant the bondholders a second-lien on certain collateral that secures the proposed term loan (compared with an unsecured position currently) and--in our view--improve their recovery prospects.
The stable outlook on Navistar reflects our expectation that the company's cost-reduction initiatives will continue to incrementally improve its profitability and that its strategic alliance with Volkswagen Truck & Bus will remain on track to deliver additional cost savings. However, given the company's sizable debt balance, we continue to expect that it will maintain leverage of about 10x following the proposed refinancing transaction.
We could raise our ratings on Navistar if the company continues to strengthen its core business such that we revise our assessment of its competitive position. In order to raise our ratings, the company would also need to meaningfully reduce its debt leverage toward 7x, maintain a funds from operations-to-debt ratio of at least 8%, and generate positive free cash flow on a sustained basis.
We could lower our ratings on Navistar if the company faces challenges that prevent it from maintaining its profitability, causing its credit measures to deteriorate or its liquidity to weaken. We could also lower our ratings if we come to believe that Navistar is dependent upon favorable business, financial, and economic conditions to meet its financial commitments, or if we view the company's financial obligations as unsustainable in the long term.