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updated: 9/17/2012 1:10 PM

Fitch cuts Navistar ratings on cash flow worries

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Associated Press

Fitch Ratings on Monday cut its issuer default ratings for Lisle-based Navistar International Corp. and its financing subsidiary another notch deeper into non-investment grade status, citing the increasing risk surrounding the company's cash flow.

Fitch lowered the ratings to "CCC" from "B-." The outlook is negative.

The ratings service said the moves reflect the Lisle, Ill.-based heavy truck and engine maker's heightened financial risk, mainly involving its liquidity and negative manufacturing cash flow, and expectations that those concerns will continue into next year.

Navistar has struggled this year amid uncertainty about whether its Class 8 engine, used in the largest commercial trucks, would get Environmental Protection Agency approval.

The company said in July that it was in talks with the EPA on a plan that would allow it to continue shipping trucks while it makes a transition to a new emission-reducing technology that will bring it into compliance with EPA requirements. The new technology is expected to be available beginning early next year. Navistar said at that time that the new plan would add to product development costs.

In the meantime, the company is working to cut other costs, is trimming its workforce and is considering putting some of its businesses up for sale.

Fitch said that Navistar needs to fix those problems in order to avoid cash pressures, adding that its near-term free cash flow could be hurt by costs related to its revised engine strategy, job cuts and possible additional restructuring moves.

In addition, Navistar's free cash flow also could be hurt by a drop in fourth-quarter sales volumes and lower margins related to the use of technology from other companies, higher warranty expenses and non-conformance penalty costs, Fitch said.

At the same time, industry demand and the pace of a possible recovery in Navistar's market share are tough to estimate and could potentially lead to significant negative free cash flow if economic conditions and customer confidence are worse than expected, Fitch said.

Navistar shares fell 47 cents, or 1.8 percent, to $25.56 in morning trading Monday. Its shares are up 29 percent from its 52-week low of $19.79 set Sept. 5. But they are down 47 percent since hitting a high for the year of $48.18 in early February.

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