Supply Chain

Navistar Navigates a Critical Refinancing

While the truck maker's director of corporate finance says its turnaround is progressing, analysts say the $12 billion company's liquidity is &doub...
Vincent RyanApril 19, 2013

Is Navistar done paying for its past mistakes? The major player in the market for heavy-duty trucks and school buses amended its loan agreements earlier this month, lowering interest rates overall and gaining some other concessions from lenders. But analysts don’t think the company went far enough to bolster its liquidity and added insult to injury by paying some upfront fees to renegotiate its debt.

Vicki Bryan, an analyst at Gimme Credit, said in a report that the credit-facility amendments were “more likely executed to help Navistar’s bankers – rather than Navistar or its investors – sleep easier at night.”

But Anthony Aiello, director of corporate finance at Navistar, told that that’s untrue. “None of this was driven by the lenders,” he says “It was not driven at all by uncomfortableness from the lender’s perspective.”

Navistar has had a rough three years since an ill-fated decision to go with a different engine technology than the rest of the industry led to a failure to meet 2010 federal emissions standards. The project cost the company $700 million, and Navistar ended up with a noncompliant engine that was less attractive to customers and that the company had to pay fines on to include in its vehicles.  

Navistar posted earnings losses and dropping sales in 2012. On its March earnings call for the quarter ending January 31, the company reported a net loss of $123 million, with revenue declining by $2.6 billion.

Navistar doesn’t have a huge liquidity cushion. Its cash balance was $1.1 billion in the first quarter. On the company’s earnings call, CFO Andrew Cederoth said expanding production in the second quarter would mean “margins will improve and working capital will become a benefit.”

But the near-term cash level will be sufficient only if the company can break even on cash flow going forward, says Rick Tauber, a credit director at Morningstar. “They have been burning through a fair amount of cash recently.”

Indeed, to amend its loans, Navistar had to pony up some. It repaid $300 million of term-loan debt, which it funded by selling $300 million of senior notes that carry a higher interest rate, 8.25 percent, than the interest rate on the loan. The amendments also came with a fee of 1 percent of the balance of the term loan and a $175,000 charge to alter terms on an asset-backed loan.

In return, the interest cost on the existing $700 million of the term loan debt was cut by 1 percent, to 4.5 percent above the London interbank offered rate, and Navistar negotiated a reduction in the LIBOR floor of 25 basis points, says Aiello.

Two other changes favorable to Navistar: 1) removal of a “springing maturity” set to take effect next July if Navistar hadn’t refinanced a convertible-note issue; and, 2),  a revision to the makeup of the collateral backing the company’s asset-backed revolver.

“The bank market was willing to step up and provide some of those terms, so that’s good for the company. But [Navistar] did pay some fees and it shrinks the whole size of the facility as a result,” says Tauber. “Liquidity is tight.”

Navistar’s only near-term maturity is the $570 million convertible bond due in October 2014. But with the company’s stock price up $9 per share so far in 2013, Morningstar’s Tauber thinks Navistar has a number of ways it could deal with the convertible: negotiate with bondholders to extend it, issue another convertible bond or sell new equity. “They seem to have options, but there’s still clearly some risk out there,” Tauber says. “I expect them to manage through it, but at the end of the day it comes down to selling trucks.”

Navistar has lost some market share in the heavy-duty truck space since its problem meeting emissions standards. But on Tuesday the Environmental Protection Agency approved a big-bore diesel engine from Navistar that meets federal emissions requirements and may enable the company to win back market share.

But Navistar’s return to profitability is still in process. The company will begin selling the newly approved engine at the end of April, but according to Gimme Credit’s Bryan the cash from the sales “may not begin to materialize until early summer.”

Meanwhile, Navistar is on a continuing drive to cut $250 million in costs. It’s in the process of closing a plant in Garland, Texas and is tackling operational efficiencies. One target area is procurement, says Basili Alukos, an equity analyst at Morningstar.

“Before the current [operations-focused] management team was in place, Navistar would offer customers 20 options for side-view mirrors, whereas Daimler offers four,” Alukos says. “If they go from 20 to 4 they can make the products more standardized and cut down on purchases,” he says. Navistar also hopes to take a knife to needless freight costs and inefficiencies related to its supply chain and the fulfillment of customer orders, Alukos says.

There is one final hurdle for Navistar: a “massive pension and health insurance plan,” according to Alukos. As of March it was underfunded by more than $1.9 billion. The company expects to contribute $220 million this year to help plug the funding gap.

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