Fitch Ratings has placed the Issuer Default Ratings and debt ratings for Navistar International Corporation (NAV), Navistar, Inc. and Navistar Financial Corporation (NFC) on Rating Watch Positive.

The action reflects Fitch's expectation that the completion of Traton SE's acquisition of NAV targeted for mid-2021 is likely to lead to an upgrade of the ratings for NAV, Navistar, Inc. and NFC by at least one notch.

Fitch views Traton's credit profile, which is owned 90% by Volkswagen AG (BBB+/Stable), as materially stronger than NAV's. NAV has realized cost savings and other benefits from an existing alliance with Traton that was implemented in 2017, and these benefits could be expanded and become permanent after the transaction closes including a closer strategic alignment and further integration of operations. The addition of NAV to Traton's global portfolio of commercial vehicle manufacturers will significantly increase Traton's access to the market in North America where it does not have a material presence.

KEY RATING DRIVERS

Resolution of the Rating Watch: An upgrade of NAV's ratings by at least one notch is considered likely based on Fitch's assessment of moderate linkage between NAV and Traton upon completion of the acquisition. The linkage will be supported by Traton's 100% ownership of NAV, NAV's strategic importance to Traton, and further integration of operations. An upgrade of more than one notch could be considered if Traton takes steps to strengthen NAV's balance sheet or provides formal support for NAV.

If the transaction does not close, NAV's ratings could be affirmed if the current alliance is maintained and NAV's performance and credit measures improve from trough levels in 2020. The ratings could be downgraded if the acquisition is not completed and NAV's alliance with Traton is weakened or terminated, which Fitch believes would make it more difficult for NAV to support EBITDA margins, return to positive FCF after 2021, invest in technology and product development, and rebuild market share.

Weak Financial Performance: NAV's financial results and credit measures have been negatively affected by weak industry demand associated with the coronavirus pandemic. Fitch expects results will improve as demand recovers for commercial trucks but that results could remain weak through 2022. Revenue declined 34% in fiscal 2020 and EBITDA margins were 5.1% compared to 8.5% in 2019. However, orders have recovered strongly since mid-2020 and Fitch expects margins will improve by at least 200 bps over the next two years. Fitch believes there is upside to NAV's performance if the current industry recovery is sustained and NAV regains market share.

Elevated Leverage: NAV's debt/EBITDA was over 9x as of Oct. 31, 2020 which Fitch expects will remain above 5x through 2022. A return to lower leverage will depend on NAV's ability to rebuild EBITDA margins and FCF and recover market share which declined in 2020, partly reflecting the company's exposure to rental and leasing customers. Fitch believes an improvement in operating performance is achievable and will be supported by NAV's alliance with Traton including a procurement joint-venture and technology investments.

Adequate Liquidity: Manufacturing cash at FYE 2020 increased to $1.7 billion from $1.3 billion one year earlier and reflected proceeds from $600 million of debt issued in the second fiscal quarter used to support liquidity. Fitch expects liquidity will be sufficient in the near term, assuming truck demand continues to recover in 2021. There are no large debt maturities prior to November 2024, but NAV will fund a portion of $300 million of expenditures, including capex and pension contributions, that were deferred from 2020 to 2021 to conserve cash during the pandemic. Other potential uses of cash include payments associated with litigation. Low leverage at Navistar Financial Corporation (NFC) mitigates the risk of support being required from NAV.

Negative FCF: Fitch expects FCF will worsen in 2021 due to the possible payment of litigation charges recognized in 2020, higher capex, and the impact of cash deployment deferred from 2020. When considering these items, Fitch estimates FCF in 2021 could exceed negative $600 million compared with negative $220 million in 2020 before becoming positive in 2022.

Rating Concerns: Other rating concerns include the highly cyclical nature of NAV's commercial truck markets, the company's weaker financial position and smaller scale compared with large global peers, and a 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 and post-retirement benefits under a 1993 settlement agreement. NAV recognized charges in 2020 totaling more than $300 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 2.7 as of Oct. 31, 2020. As a result, no adjustments to debt are calculated by Fitch with respect to support for NAV's Financial Services operations.

Navistar Financial Corporation (NFC)

Fitch believes NFC is core to NAV's overall franchise, thus the IDR and Rating Watch of the finance subsidiary are equalized with, and directly linked to that of its ultimate parent. The view that the subsidiary is core is supported by shared branding 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 is formally governed by the Master Intercompany Agreement, as well as a provision referenced within NFC's credit agreement requiring NAV to own 100% of NFC's equity at all times.

Beyond these support-driven considerations, Fitch also considers NFC's consistent operating performance and solid asset quality, which are counterbalanced by elevated leverage levels relative to stand-alone finance companies, although leverage is consistent with other captive finance companies.

Asset quality metrics at NFC remained strong in 2020, with negligible net charge offs in the fiscal year ended Oct. 31, 2020 (FY20) as NFC has been focused on the wholesale portfolio, which, has historically experienced lower loss rates compared to the retail portfolio. At fiscal 2020, delinquencies greater than 90 days past due as a percentage of total finance receivables was 0.03%, down from 0.28% a year ago. In fiscal 2020, NFC's net finance receivables balances decreased 24%, yoy, reflecting a decline in dealer inventory levels. Fitch expects modest asset quality deterioration at NFC as a result of the coronavirus pandemic.

NFC's profitability metrics deteriorated in fiscal 2020, with revenue decreasing 37% compared with the prior year primarily as a result of a decline in average portfolio balances, lower interest rates charged to customers, and reduced fees charged to NAV. This translated to pretax returns on average assets of 1.3% in fiscal 2020, down from 3.5% in fiscal 2019. 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 3.7x at FY20, down from 4.4x at fiscal 2019, given lower funding requirements for reduced finance receivables. If NFC's loan to its parent were instead classified as a dividend, thus reducing NFC equity, leverage would have been 7.7x at fiscal 2020, down from 9.1x 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 to other captive finance companies. Secured debt is comprised of warehouse facilities, asset-backed securitization issuances, and bank credit facilities. 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 currently has a weaker financial profile, including higher leverage and lower FCF, than other global heavy-duty truck original equipment manufacturers (OEMs). These factors are important with respect to investing in the business and adjusting to industry cycles. Several OEMs are larger than NAV or are affiliates of global vehicle manufacturing companies, giving them greater access to financial and operational resources and markets. Peers include Daimler Trucks North America LLC, a subsidiary of Daimler AG (BBB+/Stable); AB Volvo (BBB+/Stable); PACCAR Inc. (not publicly rated); and MAN SE and Scania AB which are part of Volkswagen AG's (BBB+/Stable) Traton SE unit. NAV's existing alliance with Traton mitigates concerns about NAV's smaller scale and weaker financial position compared with its global peers. In fiscal 2020, 90% percent of NAV's consolidated revenue was located in the U.S. and Canada which makes it more sensitive to industry cycles than competing OEMs that have greater geographic diversification.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer, prior to the pending acquisition by Traton, include:

A recovery in NAV's heavy duty truck market contributes to 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 approximately 200 bps over the next two years compared to 5.1% in 2020 as calculated by Fitch;

Debt/EBITDA improves in 2021 but remains elevated, followed by a decline below 6.0x in 2022.

NAV's market share improves in 2021 after declining in 2020;

FCF exceeds negative $600 million in 2021 and becomes positive in 2022;

Fitch's base case for NAV assumes the alliance with Traton is unchanged, and cost efficiencies and product development are executed as planned.

Recovery Analysis

The recovery analysis for NAV reflects Fitch's expectation that the enterprise value of the company would be maximized as a going concern rather than through liquidation. Fitch assumed a 10% administrative claim. A going concern EBITDA of $556 million represents Fitch's estimated post-emergence stabilized EBITDA following an industry downturn. Stabilized EBITDA has been revised slightly from $571 million in the previous recovery analysis to recognize the risk of a slower improvement in revenue partly associated with weak demand in NAV's rental and leasing business.

An EBITDA multiple of 5.0x is used to calculate a post-reorganization valuation below the 7x median for the industrial and manufacturing sector. The multiple incorporates cyclicality in the heavy-duty truck market, the highly competitive nature of the heavy-duty truck market and NAV's smaller size compared with large global OEMs.

Fitch assumes a fully used asset-based credit facility, excluding a liquidity block, primarily for standby LOCs that could be utilized during a distress scenario. The recovery analysis also reflects senior-priority secured used-truck financing provided by NFC and intercompany loans to NAV that are included in unsecured debt.

The secured term loan is rated 'BB-'/'RR1', three levels above NAV's IDR, as Fitch expects the loan would see a full recovery in a distressed scenario based on a strong collateral position. The senior secured third-lien notes are rated 'BB-'/'RR1', as they would also be expected to see a full recovery based on a first-lien stock pledge on Navistar International B.V. and a junior-lien position behind the term loan. Senior unsecured bonds and the unsecured recovery zone bonds are rated two notches below NAV's IDR due to poor recovery prospects in a distress scenario.

NFC

The rating assigned to the senior secured bank credit facility is one-notch above NFC's long-term IDR and reflects Fitch's view that recovery prospects under a stress scenario for the facility are good. The credit facility's collateral coverage covenant of 1.35x mitigates Fitch's concerns that NFC could securitize all its remaining unencumbered assets, leaving other senior secured lenders in a subordinate collateral position to the company's securitizations.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of NAV's ratings by at least one notch is likely based on Fitch's assessment of moderate linkage between NAV and Traton upon completion of the acquisition, supported by Traton's 100% ownership of NAV, NAV's strategic importance, and a partial integration of operations through the existing alliance implemented in 2017.

An upgrade of more than one notch could occur if Traton plans to strengthen NAV's balance sheet or provide formal support for NAV.

Factors that could, individually or collectively, lead to negative rating action/downgrade:

The acquisition by Traton does not occur or the alliance with Traton is terminated;

FCF is consistently negative;

Manufacturing EBITDA margins are below 5%;

There is a material adverse outcome from litigation beyond charges recognized in 2020;

Material support is required for financial services.

NFC

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to positive rating action/upgrade would be linked to Fitch's view of NAV's credit profile, as NFC's ratings and the Rating Watch are linked to that of its parent. Fitch cannot envision a scenario where the captive would be rated higher than its parent.

Factors that could, individually or collectively, lead to negative rating action/downgrade include a change in the perceived relationship between NAV and NFC. For example, if Fitch believed that NFC had become less central to NAV's strategic operations and/or adequate financial support was not provided to the captive finance company in a time of need. In addition, consistent operating losses, a material and sustained change in balance sheet leverage, and/or deterioration in the company's liquidity profile, any of which alters NFC's perceived risk profile and/or requires the injection of regular financial support from NAV, could also drive negative rating actions.

The ratings on the senior secured bank credit facility are sensitive to changes in NFC's IDR, as well as the level of unencumbered balance sheet assets available relative to outstanding debt.

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

NAV's liquidity at the manufacturing business as of Oct. 31, 2020 included cash and equivalents totaling $1.75 billion, excluding restricted cash and cash at Blue Diamond Parts. Liquidity includes availability under a $125 million ABL facility under which there were no borrowings as of Oct. 31, 2020. Borrowing capacity under the ABL is reduced by a $13 million liquidity block and letters of credit issued under the facility. Liquidity was offset by current maturities of manufacturing long-term debt of $45 million. There are no large debt maturities before November 2024. NAV plans to make minimum required contributions of $320 million to its pension plans in fiscal 2021. The net pension obligation was $1.4 billion (57% funded) at Oct. 31, 2020.

At Oct. 31, 2020 debt at NAV's manufacturing business totaled approximately $3.9 billion, as calculated by Fitch, including intercompany debt of $363 million from financial services, unamortized discount and debt issuance costs. Debt was $1.8 billion at the financial services segment, the majority of which is at NFC. Consolidated debt totaled $5.3 billion.

NFC

Fitch believes NFC's current liquidity is adequate given available resources and the company's continued ability to securitize originated assets in the current market environment. However, Fitch notes that liquidity may become constrained if NFC is unable to refinance maturing debt on economic terms.

At FY20, NFC had $50.1 million of unrestricted cash, approximately $340 million of availability under its wholesale note funding facility (subject to collateral requirements) and $210 million available on the senior secured bank revolving facility. The maturity date for the revolver, which had an outstanding balance of $538 million at fiscal 2020, is May 2024.

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 rating of NFC is directly linked to the rating of Navistar Inc. (its parent company) considering it is a core subsidiary of Navistar Inc.

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 ACTIONS

ENTITY/DEBT	RATING	RECOVERY	PRIOR
Navistar International Corporation	LT IDR	B- 	Rating Watch On		B-

senior unsecured

LT	CCC 	Rating Watch On		CCC

Senior Secured 3rd Lien

LT	BB- 	Rating Watch On	RR1	BB-

senior unsecured

LT	CCC 	Rating Watch On	RR6	CCC
Navistar, Inc.	LT IDR	B- 	Rating Watch On		B-

senior secured

LT	BB- 	Rating Watch On	RR1	BB-
Navistar Financial Corp.	LT IDR	B- 	Rating Watch On		B-

senior secured

LT	B 	Rating Watch On	RR3	B

VIEW ADDITIONAL RATING DETAILS

Additional information is available on www.fitchratings.com

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