S&P cuts Navistar

Standard & Poor's downgraded Navistar International Corp. and maintained a negative outlook. Ratings affected include Navistar International's $100 million 7% senior notes due 2003 and $400 million 9.375% senior notes due 2006, cut to BB from BB+, its $250 million 8% senior subordinated notes due 2008, cut to B+ from BB-, and Navistar Financial Corp.'s $200 million 4.75% subordinated exchangeable notes due 2009, cut to B+ from BB-.

S&P said it lowered Navistar in response to weak operating results, diminishing financial flexibility and its expectation that persisting weak demand in the North American truck market will continue for the next several quarters.

The current softness in the medium duty market reflects the weak U.S. economy and the reluctance by leasing companies to commit to new orders until there are more definitive signs of an economic recovery, S&P noted. Class 8 (heavy-duty) truck sales have shown some improvement, resulting mainly from the "pre-buy" of trucks which is the result of the new EPA emission standards which go into effect Oct. 1, 2002. However, this modest up-tick in order activity is expected to be temporary, and a material improvement in the sector is not expected until the middle of 2003.

Navistar continues to focus on its cost competitiveness, emphasizing improvements in labor productivity, being achieved in part through shifting production to lower-cost facilities, S&P said. However, financial performance is not expected to reach previously expected levels in the near term. In addition, a significant reduction in debt is unlikely over the next several years.

S&P said the negative outlook reflects its concerns that material improvement in financial performance could be delayed and that financial flexibility will erode further if the current downturn is prolonged past the middle of 2003.

Moody's lowers Navistar outlook

Moody's Investors Service lowered its outlook on Navistar International Corp. and Navistar Financial Corp. to negative from stable and confirmed its ratings, including its senior debt at Ba1.

Moody's said it revised the outlook in response to weaker than expected demand in Navistar's key class 6 and 7 truck markets during the third quarter ended July 31, 2002; the potential weakness in class 8 demand following the October 2002 implementation of more stringent emission regulations; the growing uncertainty regarding the timing and strength of any rebound in demand during 2003; and, the possible disruption in operating efficiencies that could result from the pending contract negotiations with the UAW.

This potentially more stressful operating environment could lead to another year of negative free cash flow for 2003, a material erosion the company's $454 million liquidity position, and further pressure on the Ba1 rating, Moody's said.

The rating could also come under pressure if Navistar is unable to achieve a significant reversal in working capital requirements during 2003, following what Moody's said it views as a large, but temporary, build up in inventory during the third quarter of fiscal 2002.

Despite operational strengths, Navistar must contend with some formidable challenges, Moody's said. The prolonged downturn in the North American truck market has severely eroded the earnings and cash generation of Navistar's industrial operations, and has also stressed the portfolio quality of Navistar Financial. For the nine months to July, 2002, the industrial operations generated an operating loss of approximately $152 million and a cash burn (after working capital and capex) of $500 million.

Moreover, the industrial company's debt burden (including about $500 million in sale-leasebacks) is high at $1.4 billion, the rating agency said. A significant portion of Navistar's cash burn has been due to a large increase in working capital as inventory was built up in advance of new model launches, and as the company implemented other temporary shifts in production schedules.

S&P says Amkor unchanged

Standard & Poor's said Amkor Technology Inc.'s B corporate credit rating and stable outlook remain unchanged on news that its plan to sell 20 million shares in minority-owned Anam Semiconductor Inc. to Korea's Dongbu Group is postponed following Dongbu and Anam's inability to come to terms on a letter of intent to transfer technology and set purchasing rules with semiconductor wafer buyer Texas Instruments.

The sale of shares had been expected to generate $100 million in proceeds for bank debt repayment, modestly lowering Amkor's total $1.9 billion debt load, S&P noted.

It added that Amkor's liquidity, with $162 million in cash balances as of June 2002 and a $100 million unused revolving credit facility, remains adequate.

Additionally, S&P expects Amkor to remain within requirements for minimum EBITDA and liquidity levels and within maximum capital expenditure levels for the remainder of the company' amended bank facility covenant term expiring in December 2002.

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