DBRS Assigns Ratings to Navistar Financial, S.A. de C.V., Trend Stable

DBRS, Inc. (DBRS) assigned a Short-Term Issuer Rating of R-5 and a Short-Term Instruments Rating of R-5 on the DBRS Global Scale to Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada (Navistar Financial Mexico or the Company). Concurrently, DBRS assigned a Short-Term Issuer Rating of R-3.MX and a Short-Term Instruments Rating of R-3.MX, on the DBRS National Scale to the Company. The trend on all ratings is Stable.

Navistar Financial Mexico’s ratings take into consideration DBRS’s view that the Company is a strategic subsidiary of its owner, Navistar International Corporation (Navistar International, or the Parent), supporting the sales of new Navistar International truck and truck parts in Mexico, and to a lesser extent, Latin America. The Company also provides intercompany loans to related entities in Mexico, including the Parent’s largest truck manufacturing operations in Mexico. DBRS notes that the ratings reflect the strategic coordination of operations between the Parent and Navistar Financial Mexico. While there is no formal support agreement or keep-well agreement in place between the Company and the Parent, DBRS notes that the Parent has supported the Company’s capital position in the past. The most recent support was US$10 million in 2010. Given the strategic coordination between Navistar Financial Mexico and its Parent, as well as past support, it is DBRS’s view that the Parent would potentially provide some future support to the Company, if necessary, although the certainty and timeliness of support is uncertain. As such, the rating of Navistar Financial Mexico remains closely linked to the credit fundamentals of the Parent.

On an intrinsic basis, the Company has a solid franchise in Mexico, reflecting a 100% penetration rate of Navistar International dealers, and a 45% retail penetration rate for new Parent truck sales. Ratings also consider the Company’s resilient pre-tax profits, acceptable and manageable credit profile, funding diversity, and reasonable capitalization, especially given its current risk profile.

The Stable trend reflects the stability of the Parent’s fundamentals, which were augmented by Volkswagen AG’s recent equity investment and strategic alliance with Navistar International. The trend also considers DBRS’s expectation that Navistar Financial Mexico’s earnings will remain resilient, and balance sheet fundamentals sound. Nonetheless, DBRS notes several potential headwinds that could pressure performance, and potentially the ratings, including material changes to NAFTA, as well as the upcoming presidential election in Mexico. DBRS will continue to monitor these potential headwinds and any impact on the Company’s financial fundamentals.

DBRS anticipates that the Company’s solid franchise will continue to support resilient earnings going forward. The Parent operates its largest truck manufacturing facility in Mexico, and 20.5% of this facility’s production is sold into the Mexican market. For 9M17, Navistar Financial Mexico reported earnings of M$319.5 million, up 14.9% from M$278.1 million for 9M16, reflecting higher non-spread income. For full-year 2016, the Company reported a moderate 2.0% YoY decrease in earnings to M$345.7 million driven by a sizeable increase in provisions for loan losses, in part due to loan growth, mostly offset by higher levels of operating lease income and spread income, along with a decrease in management expenses.

From DBRS’s perspective, Navistar Financial Mexico has solid balance sheet fundamentals. Gross write-offs were manageable at 0.67% of average loans for 9M17, while reserve coverage is solid at 3.2% of loans and 1.3x non-performing assets. During 9M17, NPAs declined 30.0% to M$277.0 million. However, at 2.4% of total loans, NPAs remain above the Company’s historical levels. DBRS considers the improving trajectory in NPAs as reflecting the Company’s actions to strengthen collection activities, as well as transfers out of the non-performing category. However, DBRS notes that the Company’s credit portfolio does exhibit a degree of customer concentration, which DBRS will monitor closely for any signs of deterioration and the potential impact on the Company’s ratings.

Funding is relatively diverse. It is predominantly sourced from development banks, commercial banks, and the debt markets, with some concentration with development banks. Importantly, 37.2% of the Company’s approved bank credit lines are guaranteed by Navistar International Corporation or Navistar Financial Corporation. The Company also shares a line of credit with an affiliate, Navistar Financial Corporation. The Company’s balance sheet leverage is manageable, and low relative to other captive finance company peers. As of September 30, 2017, the Company’s debt/equity ratio was an acceptable 3.2x. Finally, Navistar Financial Mexico’s capitalization is considered reasonable, given the Company’s current risk profile. At September 30, 2017, the Company’s capital position had increased to M$13.9 billion up by 11.6% from YE16, driven by earnings retention.

RATING DRIVERS
Given DBRS’s view that Navistar Financial Mexico’s ratings are closely tied to the financial strength of the Parent, the Company’s ratings will be impacted by changes in Navistar International’s credit fundamentals. Given this linkage between Navistar Financial Mexico and Navistar International Corporation, improvements to Navistar International’s credit fundamentals could have positive rating implications for Navistar Financial Mexico. Conversely, given this linkage, deterioration in the Parent’s credit fundamentals could negatively impact Navistar Financial Mexico’s ratings. Finally, sustained and material erosion of Navistar Financial Mexico’s fundamentals or a prolonged inability to access funding at a reasonable cost could have negative rating implications.

Notes:

All figures are in Mexican Pesos unless otherwise noted.

The applicable methodologies are Metodología global para calificar compañías financieras (October 2016) and Metodología global para calificar bancos y organizaciones bancarias (May 2017), both of which can be found on our website under Methodologies.

For US: The primary sources of information used for this rating include company documents and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

Lead Analyst: Mark Nolan, CFA, Vice President, US Non-Bank FIG – Global FIG
Rating Committee Chair: Michael Driscoll, Managing Director, Head of NA FIG – Global FIG
Initial Rating Date: January 30, 2018
Last Rating Date: Not applicable as no last rating date.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.