NEW YORK – Navistar International Corp. bond yields are rising while those of other U.S. junk-rated truckmakers fall as investors penalize it for an engine design flaw and Carl Icahn expands his influence in the industry.
Yields on its notes are up 2 percentage points this year as those on the 20 most-indebted high-yield automotive companies fall, according to Bank of America Merrill Lynch index data. Icahn, who owns 14.8 percent of Navistars shares, is offering $3 billion for Oshkosh Corp. after a failed bid last year prompted speculation of a merger between the two companies.
Navistar, which spent $600 million to design engines that failed to meet emissions rules, is paying Cummins Inc. for replacement technology to reverse a forecast $325.4 million annual loss in the year ended Oct. 31. Liquidity has declined for four straight quarters, and the Lisle, Ill.-based firm sold $200 million of equity last month to bolster cash.
Liquidity could get very tight over the next few quarters, Kirk Ludtke, an analyst at Stamford, Conn.-based securities research and brokerage firm CRT Capital Group, said in a telephone interview. Management just tapped the equity market at a four-year low, which says a lot.
Navistars quick ratio, a measure of liquidity, has fallen in each of the last four quarters since declining below 1 at the end of 2011, meaning it cant pay its current liabilities from cash and near-cash holdings.
The company, which is winding down its primary operations in Fort Wayne, had about $3 billion in long-term debt on July 31, it said in a Sept. 6 regulatory filing.
Navistar also took out a $1 billion term loan on Aug. 17, using part of the proceeds to repay outstanding loans from an October 2011 credit facility. That borrowing increased the net debt by $740 million, according to Vicki Bryan, an analyst at research firm Gimme Credit. The loan yields 7 percent or 5.5 percentage points more than the London interbank offered rate, whichever is higher. Libor, the rate at which banks say they can borrow from each other, was fixed at 0.31 percent Monday.
Navistar consumed as much as $532 million in cash in its fourth quarter, which ended Oct. 31, after reporting $706 million of cash and equivalents on July 31, Bryan estimated. Navistar needs $500 million to $1 billion to remain solvent through next year, she wrote in an Oct. 24 report.
The companys liquidity strain is exacerbated by mandatory pension payments and cash costs associated with the overhaul of product lines and restructuring-related outlays, Bryan wrote in an Oct. 25 report. Its unfunded pensions and other postemployment benefits exceed the companys market value, she wrote.
Navistars $900 million of 8.25 percent bonds due in November 2021 fell to 94 cents on the dollar to yield 9.25 percent on Nov. 2 from 106 cents and a 7.38 percent rate at the end of 2011, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.
The companys debt is rated B2 by Moodys Investors Service and an equivalent B at Standard & Poors. The categories denote borrowers that are likely to be unable or unwilling to pay debts if business conditions deteriorate.
Yields on each of the 20 other most indebted junk-rated members of the Bank of America Merrill Lynch High-Yield Automotive and Auto Parts index have fallen by at least 0.2 percentage points since the beginning of the year.
2012 has been a challenging year, Steve Schrier, a spokesman for Navistar said in a telephone interview. Our outlook for 2013 includes a significant improvement in our performance.
We raised more than $200 million in additional capital through the equity offering, Schrier said, which allows us to put to rest the uncertainty of whether Navistar will have enough available liquidity to manage through the current industry downturn and bridge us through our new product launches throughout the year.
The company sold 10.6 million shares in a secondary offering Oct. 24, raising money to pay suppliers and to pay Cummins for 15-liter engines and to use its technology in future 11- and 13- liter Navistar models.
Sourcing the after-treatment system from another company probably costs several thousand dollars per engine, CRTs Ludtke said. Theyve given the market the impression that theyre indifferent between paying the non-conforming penalty and buying equipment from Cummins.
Icahn and Mark Racheskys MHR Fund Management LLC each bought 1.6 million additional shares in the company after the new offering, giving each about a 14.8 percent stake. A poison pill provision, adopted by the company in June to prevent coercive takeover tactics, would be triggered if a shareholder acquired 15 percent or more.
The provision would allow existing owners to buy more stock at half the market price.
The two investors each were given a seat on the Navistar board and jointly given a third position on the 10-director panel last month, according to an Oct. 8 statement. Rachesky was previously Icahns chief investment officer before striking out on his own.
Icahn is also the largest shareholder in Oshkosh with a 9.5 percent stake.
The Oshkosh board rejected his $3 billion offer to buy the company last month. Icahn said that he doesnt want to combine the two and that Oshkosh would be worth more in pieces.