Navistar (NAV, Financial) has a series of bonds that yield more than 8%. The troubled truck manufacturer has had a lot of good news this year, and the bonds look interesting.
The balance sheet shows $687 million in cash and $1.711 billion in accounts receivables. The liability side shows $1.389 billion in short-term debt, $1.003 billion in accounts payables, $3.676 billion in debt and a pension obligation of $2.907 billion. The debt load is no doubt high but not unbearable. According to Morningstar, free cash flow is negative $200 million for the last four quarters.
Sales have shrunk from $13.458 billion in 2011 to $10.140 billion in 2015. The operating margins have shrunk from 5.52% to 1.66% over that time frame which is no surprise. Free cash flow hasn’t been positive in years.
I got the idea to write on the debt from reading FPA Crescent Fund’s Quarterly Report. The holdings of this fund are quite eclectic, ranging from international stocks to corporate debt. It’s a great place to mine ideas.
The first series of bonds that we’ll discuss matures on Nov. 1, 2021. The cusip is 63934eam0, and the bonds are priced at 99.85. The yield to maturity is 8.287% (from what I see in my Charles Schwab inventory). They are rated CCC by Standard & Poor's and Caa1 by Moody’s. Comparable Treasurys yield 1.535%. Pretty good spread.
It was recently announced that the company appointed three new directors to the board. All have quite a bit of experience.
Autonomous vehicles have been in the news with big strides being made by Uber and Volvo (OSTO:VOLV A). Navistar announced that it is expanding its fleet from six to 15. It is estimated that there will by 600,000 driverless trucks by 2035.
Navistar recently rolled $250 million of debt into a new $300 million offering to fund floor plans. This is dealership financing. The bonds are 144A, meaning that only institutional buyers can invest. The debt got  high ratings from Moody's.
The most impressive piece of news that I’ve found is that Volkswagen (XTER:VOW, Financial) took a 16.6% share of Navistar. That tells me several things. One is that Volkswagen could potentially buy out Navistar and have a strong foothold in the U.S. The second is that if Navistar got into financial trouble, Volkswagen could step up and buy into a secondary offering or a series of preferreds. As I analyze these bonds, I find this a fortunate development for the truck maker. The two companies will collaborate on powertrain systems.
The Wall Street Journal wrote an article back in June about how General Motors (GM, Financial) was going to have Navistar build a series of vans, the Chevy Express and GMC Savannah, at a plant in Springfield, Ohio. Good old American companies manufacturing in the heart of the Midwest. It doesn’t get any better than that.
I like these bonds and I like the developments at Navistar. I honestly don’t think they’re going out of business in the next five years.
Disclosure: We own FPA Crescent Fund.
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