Fitch Affirms Navistar & Navistar Financial; Outlook Revised to Stable.

Business Editors

CHICAGO--(BUSINESS WIRE)--Feb. 2, 2004

Fitch Ratings affirms Navistar International Corp. (Navistar) and Navistar Financial Corp.'s (NFC) senior unsecured debt and subordinated debt ratings at 'BB' and 'B+', respectively. The Rating Outlook is revised to Stable from Negative. Approximately $2.6 billion of debt are covered by Fitch's actions.

The change in Outlook reflects not only improvements in the overall outlook for commercial vehicles in Navistar's core North American markets, but also the ongoing efforts of Navistar to reduce its cost structure. Positive developments over the last year include continuing efforts to manage both the location and cost of the workforce, the agreements concluded regarding the Chatham Ont. Canada facility and the final agreement with Ford Motor Co. (Ford) related to resolving the impact of the likely permanent cancellation of the V-6 diesel engine contract.

Rating concerns center on the magnitude of the commercial vehicle recovery, Navistar's ongoing relationship to a somewhat weakened Ford, and increases in costs related to healthcare. Navistar still faces large pension liabilities, although asset performance strongly benefited from the level of Navistar stock contained in pension funds, augmented by further stock contributions in 2003.

Based upon available industry data, fiscal 2003 appears to be the cyclical trough of the commercial vehicle market in the United States. Navistar weathered that low point relatively well, achieving near break-even results while maintaining a cash balance of $502 million (down from $549 in the previous fiscal year). Given the relative freshness of its product portfolio and its more efficient manufacturing footprint, Fitch expects Navistar to benefit from the significant industry volume uptick projected for this year. This should translate into improved cash flow generation which will likely be utilized to improve the balance sheet.

Beyond 2004, Fitch anticipates a continuing improvement in industry volumes through calendar year 2006, as customers begin to update their fleet not only to the higher than normal percentage of older vehicles but also in certain instances to get out in front of the 2007 emissions changes. Fitch anticipates another pre-buy similar to the 2002 pre-buy as customers go with cheaper, proven technology over more expensive, potentially unproven technology.

NFC is both a source of consistent earnings and a partial offset to Navistar's cyclical business. Due to the close operating relationship governed by a formal operating agreement and importance to the parent, NFC's ratings are directly linked with the parent.

NFC's profitability measures increased sharply in the fiscal year ending Oct. 31, 2003, as net income increased to $58 million from $34 million in fiscal 2002. The rise in profitability must be put into context as the majority of the increase was driven by increased receivable securitization activity, due to timing, versus the prior year. This drove gain on sale revenue to $76 million for fiscal 2003 versus $37 million in 2002. Future earnings are expected to remain stable relative to fiscal 2003 as credit costs are projected to continue to be somewhat high relative to historical performance while asset securitization activity returns to more normal levels.

Nonetheless, asset quality showed steady improvement in fiscal 2003 as delinquencies in conjunction with firming of used truck pricing reduced credit costs from fiscal 2002's levels. NFC's repossessed equipment inventory has declined to $21 million at Oct. 31, 2003 from $26 million and $78 million at fiscal year ends 2002 and 2001, respectively. NFC has done a good job in managing its way through the oversupply of class 8 trucks to reduce its repossession inventory.

NFC's capitalization has strengthened recently as internal capital formation has improved. Managed debt divided by tangible equity declined to 10.6 times (x) at Oct. 31, 2003 from 10.7x and 13.0x at fiscal year-ends 2002 and 2001. Leverage is expected to decline slightly over the next year as receivable growth moderates and NFC's equity base increases. Leverage is considered acceptable at the current rating given the company's risk profile.