Consolidated Financial Statements and Management’s Discussion and Analysis for the Quarterly Period Ended


January 31, 2018

















NAVISTAR FINANCIAL CORPORATION





A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR, INC., WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL CORPORATION








2701 Navistar Drive, Lisle, IL 60532





Telephone number  (331) 332-4000







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NAVISTAR FINANCIAL CORPORATION


AND SUBSIDIARIES





INDEX





FINANCIAL INFORMATIONPageReference


Consolidated Financial Statements:Consolidated Statements of Operations (Unaudited) - Three Months Ended     January 31, 2018 and 20173Consolidated Statements of Financial Condition - January 31, 2018 (Unaudited) and October 31, 20174Consolidated Statements of Cash Flows (Unaudited) - Three Months Ended     January 31, 2018 and 20175Consolidated Statements of Shareowner’s Equity (Unaudited) - Three Months Ended January 31, 2018 and 20176Notes to Consolidated Financial Statements (Unaudited)7Management's Discussion and Analysis of Financial Condition and Results ofOperations17

















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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Operations (Unaudited)


For the Three Months Ended January 31,Millions of dollars20182017RevenuesWholesale notes interest$14.6$15.2Retail notes and finance leases revenue0.60.3Operating leases revenue10.510.4Retail and wholesale accounts interest4.74.1Other revenues1.00.6Total revenues31.430.6ExpensesCost of borrowing:Interest expense7.38.2Other2.22.7Credit, collections and administrative4.54.6Provision for (recovery of) credit losses——Depreciation on operating leases8.28.2Total expenses22.223.7Income before taxes9.26.9Income tax expense1.22.7Net income$8.0$4.2








See Notes to Consolidated Financial Statements





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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Financial Condition


As of January 31,As of October 31,Millions of dollars20182017(Unaudited)ASSETSCash and cash equivalents$7.8$22.3Finance receivables, net of unearned income:Finance receivables1,131.61,233.9Finance receivables from affiliates29.029.1Allowance for losses(1.6)(1.6)Finance receivables, net1,159.01,261.4Net investment in operating leases151.1125.3Restricted cash and cash equivalents40.292.1Vehicle inventory3.73.1Other assets7.68.1Total assets$1,369.4$1,512.3LIABILITIES AND SHAREOWNER’S EQUITYNet accounts due to affiliates$70.0$78.4Senior and secured borrowings934.61,078.3Other liabilities46.044.8Total liabilities1,050.61,201.5Shareowner’s equityCapital stock ($1 par value, 2,000,000 shares authorized, 1,600,000 sharesissued and outstanding)1.61.6Paid-in capital134.6134.6Retained earnings182.6174.6Total shareowner’s equity318.8310.8Total liabilities and shareowner’s equity$1,369.4$1,512.3








See Notes to Consolidated Financial Statements





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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Cash Flows (Unaudited)


For the Three Months Ended January 31,Millions of dollars20182017Cash flow from operating activities:Net income$8.0$4.2Adjustments to reconcile net incometo cash flow from operations:Net gain on sale and impairment of property, equipment under operating leases and vehicle inventory(0.2)(0.1)Depreciation and amortization9.911.0Provision for (recovery of) credit losses——Net change in net accounts due to affiliates(8.4)(30.8)Net change in other assets and liabilities1.44.0Net cash provided by (used in) operating activities10.7(11.7)Cash flow from investing activities:Originations of notes and finance leases held for investment,includes affiliates(810.1)(720.3)Net change in restricted cash and cash equivalents51.910.1Collections on notes and finance leases held for investment,net of change in affiliate loans and unearned finance income877.9840.8Net change in finance receivables - accounts34.662.1Proceeds from sale of vehicle inventory0.51.8Purchase of equipment leased to others(35.4)(0.6)Net change in unsecured loans to affiliates—20.0Proceeds from sale of equipment under operating leases0.41.7Net cash provided by investing activities119.8215.6Cash flow from financing activities:Net change in revolving component of bank credit facility(3.0)5.0Principal payments on term component of bank credit facility(2.0)(130.7)Net change in secured revolving credit facilities(150.4)(79.0)Proceeds from issuance of secured borrowings16.25.1Payments on secured borrowings(5.4)(6.1)Debt issuance costs(0.4)(0.5)Net cash used in financing activities(145.0)(206.2)Change in cash and cash equivalents(14.5)(2.3)Cash and cash equivalents, beginning of period22.316.2Cash and cash equivalents, end of period$7.8$13.9Supplemental cash flow information:Interest paid$7.4$8.5Income taxes paid, net of refunds——Transfers of loans and leases to vehicle inventory1.20.2Impairments charged to affiliates0.53.7








See Notes to Consolidated Financial Statements





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Navistar Financial Corporation and Subsidiaries


Consolidated Statements of Shareowner’s Equity (Unaudited)


Millions of dollarsCapital StockPaid-In CapitalRetained EarningsTotalBalance at October 31, 2016$1.6$134.6$147.6$283.82017 Activity:Net income——4.24.2Balance at January 31, 2017$1.6$134.6$151.8$288.0Balance at October 31, 2017$1.6$134.6$174.6$310.82018 Activity:Net income——8.08.0Balance at January 31, 2018$1.6$134.6$182.6$318.8





See Notes to Consolidated Financial Statements





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





1. SUMMARY OF ACCOUNTING POLICIES


Nature of Operations


Navistar Financial Corporation was incorporated in Delaware in 1949 and is a wholly-owned subsidiary of Navistar, Inc. which is a wholly-owned subsidiary of Navistar International Corporation (“NIC”).  As used herein, “us,” “we,” “our” or “NFC” refers to Navistar Financial Corporation and its wholly-owned subsidiaries unless the context otherwise requires.  NFC is a commercial financing organization that provides wholesale, retail and lease financing for products sold by Navistar, Inc. and its dealers within the United States.  NFC also finances wholesale accounts and selected retail accounts receivable of Navistar, Inc. and facilitates financing arrangements in other countries to support NIC's global operations.


Revenue includes interest revenue from wholesale notes, retail notes, finance leases, retail accounts, wholesale accounts, secured and unsecured loans to affiliates, and rental income from operating leases. Cost of borrowing includes interest expense on debt financing and amortization of debt issuance costs.


Basis of Presentation and Consolidation


The accompanying consolidated financial statements include the assets, liabilities, revenues and expenses of Navistar Financial Corporation, its wholly-owned subsidiaries and variable interest entities (“VIE”) of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.


We prepared the accompanying unaudited consolidated financial statements in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information. Accordingly, they do not include all of the information and notes required by GAAP for comprehensive annual financial statements. In our opinion all normal recurring adjustments necessary for a fair presentation are reflected in the consolidated financial statements. We have evaluated subsequent events and transactions for potential recognition or disclosure in the consolidated financial statements through March 8, 2018, the day our consolidated financial statements were available to be issued. Operating results for the three month period January 31, 2018 are not necessarily indicative of the results for the full year. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our audited consolidated financial statements for the year ended October 31, 2017 and should be read in conjunction with the disclosures therein.


We evaluate our performance and allocate resources based on a single segment concept.  Accordingly, there are no separately identified material operating segments for which discrete financial information is available.  We do not derive revenues from any single non-affiliate customer that represents 10% or more of our total revenues.


Certain prior period amounts have been reclassified to conform to current period presentation.


Estimates


The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Significant estimates and assumptions are used for, but are not limited to vehicle inventory, net investment in operating leases, allowance for losses and income taxes. Future events and their effects cannot be predicted with certainty, and accordingly, our accounting estimates require the exercise of judgment. The accounting estimates used in the preparation of our consolidated financial statements will change as new events occur, as more experience is acquired, as additional information is obtained and as our operating environment changes.  Actual results could differ from the estimates we have used.


Recently Issued Accounting Standards


In November 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-18, "Statement of Cash Flows" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. For public business entities, the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2019. NFC is not considered a public business entity for purposes of its stand-alone consolidated financial statements. Adoption will require a retrospective transition. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements, and we expect to adopt concurrent with NIC.


In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments - Credit Losses" (Topic 326). The ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit





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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





exposures. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Our effective date is November 1, 2021, with early adoption permitted as of November 1, 2019.  We are currently evaluating the impact of the adoption of this ASU on our consolidated financial statements and expect to adopt concurrent with NIC.


In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. For public business entities, this ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date is November 1, 2020. Adoption will require a modified retrospective transition. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements and expect to adopt concurrent with NIC.


In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments - Recognition and Measurement of Financial Assets and Financial Liabilities" (Subtopic 825-10).  This ASU amends the fair value measurement, impairment measurement, presentation, and related disclosures for certain financial instruments. For public business entities, this ASU is effective for annual and interim reporting periods beginning after December 15, 2017, and early adoption is permitted. Our effective date is November 1, 2019. We do not expect the adoption of this ASU will have a material impact on our consolidated financial statements, and we expect to adopt concurrent with NIC.


In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which supersedes the revenue recognition requirements in Accounting Standards Codification Topic 605, Revenue Recognition.  This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.  The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. On July 9, 2015, the FASB deferred the effective date of this update for public business entities to fiscal years beginning after December 15, 2017, with early adoption permitted on the original effective date of fiscal years beginning after December 15, 2016.  Our effective date is November 1, 2019, but we expect to adopt concurrently with NIC on November 1, 2018. Adoption of this ASU is not expected to have a material impact on our consolidated financial statements as financial instruments and leases, which comprise our primary contracts with customers, are excluded from the scope of this ASU.


There was no other recently issued accounting guidance for which we expect a material impact on our consolidated financial statements. Additionally, there was no new accounting guidance adopted during the three months ended January 31, 2018, that had a material impact on our consolidated financial statements.


2. TRANSACTIONS WITH AFFILIATED COMPANIES


Wholesale Notes, Wholesale Accounts and Retail Accounts


In accordance with the agreements between NFC and Navistar, Inc. relating to financing of wholesale notes, wholesale accounts and retail accounts, NFC receives interest income from Navistar, Inc. at rates applied to the average outstanding balances.  In addition, NFC may receive fee income from Navistar, Inc. to adjust for other incremental borrowing costs.  The intercompany agreements are amended from time to time to reflect prevailing market rates and fees. Interest paid by dealers on wholesale notes, if any, plus the payments made by Navistar, Inc. for the typical “interest free” period offered to the dealers equals the total revenues received on wholesale notes.  Substantially all revenues earned on wholesale accounts and retail accounts are received from Navistar, Inc.  Wholesale notes, wholesale accounts and retail accounts purchased by NFC, primarily from Navistar, Inc., were as follows (in millions):


Three Months EndedJanuary 31,20182017Wholesale notes$802.9$719.9Wholesale and retail accounts661.4590.3Total$1,464.3$1,310.2





In July 2014, NFC began financing eligible used truck inventory of Navistar, Inc. under a secured note for up to $200.0 million at an advance rate of 80%, bearing interest at the prime rate plus 3.25%.  In January 2015, the secured note was amended to increase the maximum commitment to $250.0 million, and in March 2016, the secured note was amended to reduce the advance rate to 65%, and increase the interest rate to the prime rate plus 5.25%. Also under the March 2016 amendment, the maximum commitment of the secured note was reduced to $168.0 million and was further reduced to $125.0 million in December 2016. The secured note





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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





matures in July 2018, as amended.  Interest income of less than $0.1 million and $2.5 million was earned for the three months ended January 31, 2018 and 2017, respectively.  The interest income is recorded in Wholesale notes interest . The outstanding amount under the used truck inventory financing as of January 31, 2018 and October 31, 2017, was $29.0 million and $29.1 million, respectively, and is included in Finance receivables from affiliates .


Aggregate interest and fee revenue from Navistar, Inc. for the three months ended January 31, 2018 and 2017, was $13.6 million and $13.5 million, respectively.  The interest and fee revenues are included in Wholesale notes interest and Retail and wholesale accounts interest .


Finance Receivables, Operating Leases and Vehicle Inventory


Under certain circumstances Navistar, Inc. is contractually liable for losses on NFC's finance receivables and investments in equipment on operating leases, including residual values, and may be required to repurchase the repossessed collateral at the receivable principal unpaid balance or share in the impairment losses or losses on sales of vehicle inventory with NFC.  The allocation of losses (gains) between Navistar, Inc. and NFC on vehicles financed by NFC was as follows (in millions):


Three Months EndedJanuary 31,20182017Net credit losses recorded by NFC$—$—Net credit losses recorded by Navistar, Inc.——Total net credit losses$—$—Impairment losses recorded by NFC$—$—Impairment losses recorded by Navistar, Inc.0.53.7Total impairment losses$0.5$3.7Net (gains) losses on sales recorded by NFC$—$—Net (gains) losses on sales recorded by Navistar, Inc.(0.1)0.5Total net (gains) losses on sales$(0.1)$0.5





Guarantee Fees and Servicing Revenue


NFC receives fees for its guarantee of revolving debt owed by Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada (“NFM”), a Mexican finance subsidiary of NIC.  Fee amounts are amended from time to time to reflect prevailing market rates and are based on outstanding balances.  These guarantee fees were $0.3 million and $0.3 million for the three months ended January 31, 2018 and 2017, respectively, and are recorded in Other revenues .  Concurrently, NFC pays fees to NIC to provide a full backstop guarantee on all losses incurred as a result of NFC's guarantee of NFM's debt. Fees paid by NFC for this backstop guarantee for the three months ended January 31, 2018 and 2017, were $0.1 million and less than $0.1 million, respectively, and are recorded in Credit, collections and administrative .  No losses have been incurred relating to the NFM guarantees.


In April 2015, NFC and NFM entered into a fee agreement whereby NFM pays NFC an administrative fee to offset expenses incurred by NFC relating to accounts collection and servicing for certain export customers. The fee was retroactively effective to January 1, 2015.  NFC recorded fees of $0.1 million and $0.1 million for the three months ended January 31, 2018 and 2017, respectively, in Other revenues .


Unsecured Loans to Affiliates


On April 1, 2011, NFC entered into a working capital loan agreement with NFM whereby NFC has agreed to lend an aggregate amount not to exceed $100.0 million (at a floating rate equal to the Eurodollar loan rate for each month as set forth in NFC's bank credit facility).  The agreement renews annually but can be terminated by either party upon advance notice. Lending under this agreement is conditional and subject to a maximum of $20.0 million under the May 2016 bank credit facility, as amended. See Note 7, Senior and Secured Borrowings . There was a balance of zero outstanding on this loan as of January 31, 2018 and October 31, 2017.  There was interest income of zero and less than $0.1 million for the three months ended January 31, 2018 and 2017, respectively, which was recorded in Other revenues .


Support Agreement





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 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





As a condition to certain NFC lending agreements, Navistar, Inc. will not permit NFC's ratio of the sum of consolidated pre-tax income, consolidated interest expense and capital contributions from Navistar, Inc. to consolidated interest expense (“Fixed Charge Coverage Ratio”) to be less than 125% on the last day of any fiscal quarter for the period of four consecutive fiscal quarters then ended.  There were no required contributions under the support agreements during the three months ended January 31, 2018 and 2017.  Additionally, certain NFC lending agreements limit the amount of dividends NFC can pay to Navistar, Inc.


Shareowner's Equity


NFC did not pay dividends to Navistar, Inc. during the three months ended January 31, 2018 or 2017. Cash dividends paid cannot exceed the maximum amount allowable under NFC lending agreements.


Net Accounts Due to Affiliates


Net accounts due to affiliates represents the balance of other payables and receivables related to operations, such as Navistar, Inc. dealer credits for parts returns and warranty, and monthly finance fees charged to Navistar, Inc.


Defined Benefit Plans


We provide postretirement benefits to some of our employees and retirees through qualified and non-qualified plans sponsored by NIC.  Costs associated with postretirement benefits include pension and postretirement healthcare expenses for employees, retirees, and surviving spouses and dependents. Generally, the pension plans are non-contributory.  NIC's policy is to fund the pension plans in accordance with applicable United States government regulations. As of January 31, 2018, all legal funding requirements have been met.


The postretirement benefits expense recorded in Credit, collections and administrative for pension and healthcare was $0.6 million and $0.8 million for the three months ended January 31, 2018 and 2017, respectively. Contributions made to these plans correspond to the postretirement benefit expense recorded.


Defined Contribution Plans


Our defined contribution plans cover a substantial portion of employees.  The defined contribution plans contain a 401(k) feature and provide a company matching contribution.  Many participants covered by the plans also receive annual company contributions to their retirement account based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $0.1 million and $0.1 million for the three months ended January 31, 2018 and 2017, respectively, and is recorded in Credit, collections and administrative .  The defined contribution expense is funded annually in the following fiscal year.


Allocated Corporate Expenses


We are charged a proportionate share of certain corporate expenses of NIC primarily for building space and IT services. These expenses were $1.0 million and $1.0 million for the three month period ended January 31, 2018 and  2017, respectively, and are included in Credit, collections and administrative .


3. FINANCE RECEIVABLES


Our primary business is to provide wholesale, retail and lease financing for new and used trucks sold by Navistar, Inc. and Navistar, Inc.'s dealers, and as a result, our receivables and leases have significant concentration in the truck industry.  On a geographic basis, there is not a disproportionate concentration of credit risk in any region of the United States and we perform regular credit evaluations of our dealers and customers.  We retain as collateral an ownership interest in the equipment associated with leases and, on behalf of ourselves and the various trusts, we maintain a security interest in the equipment associated with wholesale notes and retail notes.  As of January 31, 2018 and October 31, 2017, no single customer represented a significant concentration of credit risk.


Finance receivables balances are summarized as follows (in millions):





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





January 31,October 31,20182017Wholesale notes$796.1$868.2Retail notes, net of unearned income25.120.4Finance leases, net of unearned income9.39.6Accounts (includes retail and wholesale)301.1335.7Finance receivables from affiliates, net of unearned income29.029.1Total finance receivables1,160.61,263.0Allowance for losses(1.6)(1.6)Total finance receivables, net$1,159.0$1,261.4





4. ALLOWANCE FOR LOSSES


We have determined there are two portfolio segments of finance receivables based on the type of financing inherent to each segment.  The retail portfolio segment consists of loans or leases to end-users for the purchase or lease of vehicles.  The wholesale portfolio segment consists of loans to dealers to finance their vehicle inventory, service parts and other accounts.  As the initial measurement attributes, assessment of credit risk, and monitoring of the performance of the receivables are consistent within each portfolio, we have determined that each portfolio consists of one class of receivable.


The activity related to our Allowance for losses for finance receivables for the three months ended January 31 is summarized as follows (in millions):


Retail portfolio20182017Allowance for losses, beginning of period$0.1$—Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$0.1$—Wholesale portfolio20182017Allowance for losses, beginning of period$1.5$1.5Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$1.5$1.5Total20182017Allowance for losses, beginning of period$1.6$1.5Provision for (recovery of) credit losses——Net recoveries (charge-offs)——Allowance for losses, end of period$1.6$1.5





The accrual of interest income from non-affiliates is discontinued on impaired loans that are 90 days or more past due resulting from credit related reasons.  Impaired finance receivables include those with specific loss reserves and certain other accounts that are on non-accrual status.  In certain cases, we continue to collect payments on our impaired finance receivables.


The following table sets forth information regarding impaired finance receivables as follows (in millions):


January 31, 2018Retail PortfolioWholesale PortfolioTotalImpaired finance receivables with specific loss reserves$—$—$—Impaired finance receivables without specific loss reserves0.1—0.1Specific loss reserves on impaired finance receivables———Finance receivables on non-accrual status0.1—0.1





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





October 31, 2017Retail PortfolioWholesale PortfolioTotalImpaired finance receivables with specific loss reserves$—$—$—Impaired finance receivables without specific loss reserves———Specific loss reserves on impaired finance receivables———Finance receivables on non-accrual status———





The allocation of specific loss reserves between NFC and Navistar, Inc. was as follows (in millions):


January 31,October 31,20182017Specific loss reserves on impaired receivables recorded by NFC$—$—Specific loss reserves recorded by Navistar, Inc.——Total$—$—








The average balance of impaired finance receivables was $0.1 million and $0.2 million for the three months ended January 31 , 2018 and 2017 , respectively.





The age analysis is used as the credit quality indicator for finance receivables. Finance receivables with installments less than 30 days outstanding are considered current. Past due amounts reflect the total exposure by contract or customer, depending on the type of receivable.  The age analysis is summarized as follows (in millions):


January 31, 2018Retail PortfolioWholesale PortfolioTotalCurrent$174.8$983.2$1,158.030-90 days past due1.30.92.2Over 90 days past due0.10.30.4Total finance receivables$176.2$984.4$1,160.6





October 31, 2017Retail PortfolioWholesale PortfolioTotalCurrent$200.4$1,058.3$1,258.730-90 days past due2.50.63.1Over 90 days past due0.30.91.2Total finance receivables$203.2$1,059.8$1,263.0





Certain finance receivables in our retail portfolio segment have been restructured at below market interest rates pursuant to court order and thereby meet the definition of a troubled debt restructuring. As of January 31,  2018 and October 31, 2017 , the balance of such restructurings was less than $0.1 million and less than $0.1 million, respectively.  NFC has no commitment to lend additional funds to these customers.





5. NET INVESTMENT IN OPERATING LEASES


Net investment in operating leases is summarized as follows (in millions):


January 31,October 31,20182017Investment in equipment under operating leases$236.4$205.3Less: Accumulated depreciation(91.0)(85.3)Net investment in equipment under operating leases145.4120.0Deferred and receivable rents, net of reserve5.75.3Net investment in operating leases$151.1$125.3








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Deferred and receivable rents, net of reserve includes $0.2 million and $0.3 million of reserves for rents past due over 90 days as of January 31, 2018 and October 31, 2017, respectively.


Operating leases are tested for impairment whenever circumstances indicate that the carrying value of a lease or group of leases may not be recoverable. If the sum of the estimated undiscounted future cash flows is less than carrying value, then an impairment is recorded for the amount by which carrying value exceeds fair value.  Impairments for the three months ended January 31, 2018, and 2017, were $0.3 million and $1.8 million, respectively. The impairments reduced Investment in equipment under operating leases and were charged to Navistar, Inc. See Note 10, Fair value measurements , for the fair value of impaired operating leases.


6. INCOME TAXES


We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense.  Ordinary income refers to income from continuing operations before income tax expense excluding significant unusual or infrequently occurring items.  The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs.  Items included in Income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, adjustments to uncertain tax positions, and adjustments to our valuation allowance following a change in judgment concerning the realizability of deferred tax assets in future years.


NFC and its subsidiaries are included in NIC’s consolidated federal income tax returns.  Certain state income tax returns are required to be filed on a separate basis and others are included in various combined reports.  In accordance with its intercompany tax sharing agreement with NIC, all federal income tax liabilities or credits are determined by NFC and its subsidiaries as if NFC filed its own consolidated return.  Income tax expense includes federal, state and foreign income taxes.


As a part of NIC's consolidated federal income tax returns, we participate in the Compliance Assurance Process, and as such, we have undergone a U.S. federal tax examination and received acceptance letters from the Internal Revenue Service (the “IRS”) through October 31, 2016. The possibility of the IRS opening up a closed tax year for additional audit is remote. Also, as a part of NIC or as a separate filing entity, we are subject to examination in various state and foreign jurisdictions over various periods.  In connection with examinations of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income.  We believe we have sufficient accruals for our contingent liabilities.  If these unrecognized tax benefits are recognized, a significant portion would impact our effective tax rate.  The interest and penalties related to our uncertain tax positions are immaterial.  While it is probable that the liability for uncertain tax positions may change during the next twelve months, we do not believe that such change would have a material impact on our financial condition, results of operations, or cash flows.


On December 22, 2017, H.R.1, commonly known as the “Tax Cuts and Jobs Act,” was signed into U.S. law (“Tax Act”).  The Tax Act reduces the statutory corporate income tax rate from a maximum 35% to a flat 21%, effective January 1, 2018.  This rate reduction required NFC to remeasure its deferred taxes as of the date the Tax Act was enacted.  NFC’s U.S. deferred tax liabilities, net of deferred tax assets, were remeasured and decreased by $1.4 million with a corresponding decrease to Income tax expense . NFC is currently evaluating the potential impact of additional provisions of the Tax Act which do not apply until 2019.


7. SENIOR AND SECURED BORROWINGS


Senior and secured borrowings , net of certain issuance costs,  are summarized as follows (in millions):





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Weighted AverageInterest RateJanuary 31,October 31,January 31,October 31,2018201720182017Bank credit facility at variable rates. Term portion due June 2018, revolver portion due September 2021, net of issuance costs of $0.2 million and $0.5 million, respectively$197.4$202.26.3%6.0%Borrowings secured by wholesale note asset-backedsecurities at rates currently between 2.3% and 4.9%, due at various dates through June 2019 net of issuance costs of $2.6 million and $3.3 million, respectively587.4681.72.8%2.5%Borrowings secured by operating and finance leases due serially through November 2022 at rates currently between 2.9% and 3.9%105.294.43.6%3.5%Borrowings secured by retail accounts at a variable rate, matures January 201944.6100.02.6%2.6%Total senior and secured borrowings$934.6$1,078.33.6%3.3%





Borrowings under the revolving portion of the bank credit facility were $124.0 million and $127.0 million as of January 31, 2018 and October 31, 2017, respectively. Borrowings under the term portion of the bank credit facility were $73.6 million and $75.7 million as of January 31, 2018 and October 31, 2017, respectively. In December 2016, and in accordance with the terms of the bank credit facility, the revolving portion of the facility was reduced to a maximum of $274.7 million, the term loan portion of the facility was paid down to $81.8 million, and the quarterly principal payments were reduced from $8.5 million to $2.0 million.  In September 2017, the revolving portion of the bank credit facility was amended and extended to a maturity date of September 2021, with the facility maximum amount reduced from $274.7 million to $269.2 million effective in June 2018.


Borrowings secured by wholesale note asset-backed securities include amounts drawn on the variable funding notes ("VFN") facility of Navistar Financial Securities Corporation (“NFSC”) of $40.0 million and $135.0 million as of January 31, 2018 and October 31, 2017, respectively. In November 2016, the maturity of the VFN was extended from May 2017 to November 2017, and the facility capacity was reduced from $500.0 million to $450.0 million. In May 2017, the VFN facility capacity was reduced from $450.0 million to $425.0 million and the maturity was extended from November 2017 to May 2018.  In December 2017, the maturity of the VFN was extended from May 2018 to December 2018, and the facility capacity was reduced from $425.0 million to $350.0 million.


In June 2017, NFSC completed the sale of $250.0 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250.0 million of investor notes that matured in June 2017.


International Truck Leasing Corporation (“ITLC”) received lease funding proceeds of $16.2 million and $5.1 million during the three months ended January 31, 2018 and 2017, respectively. As of January 31, 2018, the balance of ITLC's collateralized borrowings secured by operating and finance leases was $105.2 million compared to $94.4 million as of October 31, 2017.


In December 2016, the $100.0 million Truck Retail Accounts Corporation ("TRAC") funding facility, secured by retail accounts, was renewed to October 2017.  In May 2017, the TRAC funding facility maturity was extended from October 2017 to April 2018.   In January 2018, the TRAC funding facility maturity was extended from April 2018 to January 2019. As of January 31, 2018 and October 31, 2017, the amount borrowed under this facility was $44.6 million and $100.0 million, respectively.


8. COMMITMENTS AND CONTINGENCIES


NFC periodically guarantees the outstanding debt of affiliates.  The guarantees allow for diversification of funding sources for NFM and Navistar Comercial S. A. de C.V.  NFC's maximum guarantee exposure to this outstanding debt was $146.2 million and $142.1 million as of January 31, 2018 and October 31, 2017, respectively.  See Note 2, Transactions with Affiliated Companies for fees recorded by NFC relating to these guarantees.


9. SECURITIZATION TRANSACTIONS


NFC typically sells its finance receivables to its various wholly-owned special purpose entities (“SPEs”) in order to fund the financing requirements of Navistar, Inc.'s dealers and customers.  NFC continues to service the receivables thereafter.  In accordance with current accounting guidance , all of these transactions qualify as secured borrowings whereas the receivables transferred and the debt issued are recorded on NFC's consolidated balance sheets, and we record the related interest revenue earned on the finance receivables and the interest expense paid on the secured borrowings.





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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)








The SPEs' assets are available to satisfy their creditors' claims prior to such assets becoming available for the SPEs' own uses or to NFC or affiliated companies.  NFC is under no obligation to repurchase any sold receivable that becomes delinquent in payment or otherwise is in default.  As seller and servicer of the finance receivables, NFC is obligated to provide certain representations and warranties regarding the receivables. Should any receivables fail to meet these representations and warranties, NFC is required to repurchase the affected receivables. These secured borrowings are payable solely out of collections on the finance receivables, operating leases and other assets transferred to those subsidiaries.  The asset-backed debt is the legal obligation of the SPEs whereby there is generally no additional recourse to NFC.  The terms of receivable sales generally require NFC to provide credit enhancements in the form of receivables over-collateralization and/or cash reserves.  The use of such cash reserves by NFC is restricted under the terms of the securitized sales agreements.


Variable interest entities


Asset-backed securities are issued by our SPE NFSC through a wholesale note owner trust.  We consolidate the trust as a VIE since we remain the primary beneficiary of the trust's assets and liabilities which include the sold receivables and the secured borrowings.  There was no change in the determination to consolidate any other entities during the three months ended January 31, 2018, and we have not provided any financial or other support that we were not contractually obligated to provide.


Other securitizations


Other SPEs transfer certain receivables, leases and other financial assets directly to investors, in order to secure borrowings.


The following table sets forth the carrying amount of transferred financial assets and (liabilities) of the consolidated VIEs and other securitizations (in millions):


January 31, 2018ConsolidatedVIEOtherSecuritizationsTotalFinance receivables, net$670.5$131.9$802.4Net investment in operating leases—91.291.2Restricted cash and cash equivalents10.230.040.2Secured borrowings(590.0)(149.8)(739.8)


October 31, 2017ConsolidatedVIEOtherSecuritizationsTotalFinance receivables, net$736.5$162.9$899.4Net investment in operating leases—81.081.0Restricted cash and cash equivalents57.634.592.1Secured borrowings(685.0)(194.4)(879.4)





10. FAIR VALUE MEASUREMENTS


In accordance with current accounting guidance, we use a three-level valuation hierarchy of fair value measurements based upon the reliability of observable and unobservable inputs used in valuations of fair value.  Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions.  The use of observable and unobservable inputs result in the following fair value hierarchy of fair value measurements:


lLevel 1 - based upon quoted prices foridenticalinstruments in active markets;lLevel 2 - based upon quoted prices forsimilarinstruments in active markets; quoted prices for identical or similar instruments in markets that are not active; or model-derived valuations whose significant inputs are observable: andlLevel 3 - based upon one or more significant unobservable input


The following section describes the valuation methodologies used to measure fair value, key inputs and significant assumptions:








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NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)





Retail Notes . The fair values of retail notes are estimated by discounting the future estimated cash flows using the interest rates and credit spreads currently being offered for notes with similar terms.


Finance Receivables from Affiliates . Finance receivables from affiliates may include retail notes, wholesale notes and wholesale accounts for which fair values are estimated separately as described in the respective category.


Senior and Secured Borrowings . The fair values of Senior and Secured Borrowings are estimated by discounting the future contractual cash flows using an estimated discount rate reflecting interest rates and credit spreads currently being offered for debt with similar terms since there is no public market for this debt.


Cash and Cash Equivalents , Wholesale Notes, Accounts (Wholesale and Retail) , Restricted Cash and Cash Equivalents , and Net Accounts Due to Affiliates . The estimated fair values of these financial instruments approximate the respective carrying values as a result of their short-term maturity, variable interest rates or highly liquid nature and are categorized within Level 1 of the hierarchy.


The following table presents the carrying values and estimated fair values of our financial instruments for which fair value does not approximate the respective carrying value (in millions):


Carrying ValueFair ValueJanuary 31, 2018TotalLevel 1Level 2Level 3Financial assets:Retail notes$25.1$25.4$—$—$25.4Financial liabilities:Senior and secured borrowings934.6938.8——938.8CarryingValueFair ValueOctober 31, 2017TotalLevel 1Level 2Level 3Financial assets:Retail notes$20.4$20.5$—$—$20.5Financial liabilities:Senior and secured borrowings1,078.31,083.8——1,083.8





As of January 31, 2018 and October 31, 2017, NFC held no financial instruments that were measured at fair value on a recurring basis.


There were no transfers of financial instruments between fair value hierarchy levels during the three months ended January 31, 2018 or 2017.


The following table presents assets that are measured at fair value on a nonrecurring basis (in millions):


January 31,October 31,20182017Impaired net investment in operating leases$9.1$9.4Vehicle inventory3.73.1





The primary input for determining the fair value of impaired net investment in operating leases and vehicle inventory are dealer vehicle value publications, adjusted for certain market factors, which are Level 2 inputs.


11. LEGAL PROCEEDINGS


We are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings, which constitute ordinary, routine litigation incidental to our business.  In our opinion, the disposition of these proceedings and claims will not have a material adverse effect on our consolidated financial condition, results of operations or cash flows.





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Management’s Discussion and Analysis of Financial Condition and Results of Operations


Forward-Looking Statements


Information provided and statements contained in this report that are not purely historical are forward-looking statements.  You should not place undue reliance on those statements because they are subject to numerous uncertainties and factors relating to our operations and business environment, all of which are difficult to predict and many of which are beyond our control. Such forward-looking statements only speak as of the date of this report and NFC assumes no obligation to update the information included in this report.  Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy.  These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or similar expressions.  These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions.  Although we believe that these forward-looking statements are based on reasonable assumptions, many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements.


Management's Discussion and Analysis of Financial Condition and Results of Operations is designed to provide information that is supplemental to, and should be read together with the consolidated financial statements and the accompanying notes presented herein. The information contained herein is intended to assist the reader in obtaining an understanding of our consolidated financial statements, the changes in certain key items in those financial statements during the period reported, the primary factors that accounted for those changes, any known trends or uncertainties that we are aware of that may have a material impact on our future performance, as well as how certain accounting principles affect our consolidated financial statements.


Overview


NFC provides financing for products sold by Navistar, Inc. and its dealers within the United States and earns interest revenue from wholesale notes, retail notes, finance leases, retail accounts, wholesale accounts, secured and unsecured loans to affiliates, and rental income from operating leases.  Our cost of borrowing includes interest expense on debt financing and debt issuance costs on bank credit facilities, asset-backed securities and other secured funding facilities.


Financing revenue increased during the first quarter of fiscal 2018 compared to the same period of 2017 as a result of a slightly higher average portfolio interest rate, while the average overall portfolio balance remained constant. Our cost of borrowing decreased primarily as a result of lower average debt balances from the utilization of a trade payable with Navistar, Inc. Additionally, income tax expense was favorably adjusted pursuant to the new Tax Act effective January 2018.


In December 2017, the maturity of the variable funding notes ("VFN") was extended from May 2018 to December 2018, and the facility capacity was reduced from $425.0 million to $350.0 million.


During 2017, International Truck Leasing Corporation (“ITLC”) received new lease funding proceeds of $16.2 million.


In January 2018, the Truck Retail Accounts Corporation ("TRAC") funding facility maturity was extended from April 2018 to January 2019.


Consolidated Comparison of Business Results


The following table summarizes our consolidated statements of operations and illustrates the key financial indicators used to assess the consolidated financial results.  Financial information is presented for the three months ended January 31 (in millions):





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20182017Change% ChangeRevenuesFinancing revenue$19.9$19.6$0.31.5Operating leases and other revenues11.511.00.54.5Total revenues31.430.60.82.6ExpensesCost of borrowing9.510.9(1.4)(12.8)Credit, collections and administrative4.54.6(0.1)(2.2)Provision for (recovery of) credit losses————Depreciation on operating leases8.28.2——Total expenses22.223.7(1.5)(6.3)Income before taxes9.26.92.333.3Income tax expense1.22.7(1.5)(55.6)Net income$8.0$4.2$3.890.5





20182017Change% ChangeWholesale notes$14.6$15.2$(0.6)(3.9)Retail notes and finance leases0.60.30.3100.0Retail and wholesale accounts4.74.10.614.6Total financing revenue$19.9$19.6$0.31.5





Three month period ended January 31, 2018 compared to the three month period ended January 31, 2017


Financing revenue increased primarily as a result of slightly higher average portfolio interest rates. Higher average retail and accounts balances were offset by lower wholesale note balances. The average overall finance receivable portfolio balance remained constant at $1.1 billion.  The average interest rate of the finance receivables portfolio was 7.2% and 7.1% for 2018 and 2017, respectively.


Operating leases and other revenues includes rental income on operating leases, interest earned on restricted cash collateral and guarantee fees.  These revenues increased in aggregate from $11.0 million to $11.5 million.


Cost of borrowing primarily includes interest expense on Senior and secured borrowings . Cost of borrowing decreased from $10.9 million to $9.5 million as we have utilized a trade payable with Navistar, Inc., and average interest rates were slightly lower. The average outstanding debt balance decreased from $1.0 billion to $925.2 million.  Our average interest rates on Senior and secured borrowings were 3.1% and 3.2% for the respective periods in 2018 and 2017.


Credit, collections and administrative expenses include costs relating to the management and servicing of receivables as well as general business expenses and wages. Depreciation expense on fixed assets decreased, partially offset by higher wages.


Income tax expense includes federal, state and foreign taxes. Our income tax expense decreased as a result of a decline in current and deferred income taxes attributed to the Tax Act which became effective January 2018. The reduction was partially offset by the impact of higher pretax profit.


Financial Condition (in millions):





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As ofJanuary 31, 2018October 31, 2017Change% ChangeCash and cash equivalents$7.8$22.3$(14.5)(65.0)Finance receivables, net1,159.01,261.4(102.4)(8.1)Net investment in operating leases151.1125.325.820.6Restricted cash and cash equivalents40.292.1(51.9)(56.4)Vehicle inventory3.73.10.619.4Other assets7.68.1(0.5)(6.2)Total assets$1,369.4$1,512.3$(142.9)(9.4)Net accounts due to affiliates$70.0$78.4$(8.4)(10.7)Senior and secured borrowings934.61,078.3(143.7)(13.3)Other liabilities46.044.81.22.7Total liabilities1,050.61,201.5(150.9)(12.6)Total shareowner'sequity318.8310.88.02.6Total liabilities and shareowner's equity$1,369.4$1,512.3$(142.9)(9.4)





Balances as of January 31, 2018 compared to balances as of October 31, 2017


Finance receivables, net decreased $102.4 million.  Wholesale notes decreased $72.1 million reflecting a decrease in dealer inventory levels.  Retail notes and finance leases, net of unearned income, increased by $4.4 million primarily as a result of originations during the period.  Accounts balances decreased by $34.6 million, primarily related to retail fleet accounts receivable. Finance receivables from affiliates, net of unearned income, decreased slightly by $0.1 million related to the lower balance on the used truck secured note with Navistar, Inc. Allowance for losses was unchanged.


Restricted cash and cash equivalents decreased from $92.1 million to $40.2 million. The decrease primarily relates to the pay down of the VFN facility and the corresponding decrease in the required wholesale trust size.


Vehicle inventory increased from $3.1 million to $3.7 million primarily as a result of additions for off-lease vehicles exceeding sales and impairments of $0.5 million and $0.2 million, respectively.


Other assets decreased from $8.1 million to $7.6 million primarily as a result of the amortization of debt issuance costs exceeding new issuance costs of $0.4 million.


Net accounts due to affiliates decreased from $78.4 million to $70.0 million primarily relating to the pay down of the trade payable to Navistar, Inc. in the amount of $19.0 million, partially offset by an increase in loan purchases not settled as of period end.


Senior and secured borrowings decreased by $143.7 million primarily as a result of the decrease in the level of finance receivables funded, and the reduction in restricted cash.


Other liabilities increased from $44.8 million to $46.0 million primarily as a result of income tax and incentive accruals for the period, partially offset by a $1.4 million reduction in deferred tax liabilities relating to the Tax Act.


Shareowner's equity increased from $310.8 million to $318.8 million as a result of net income of $8.0 million.


Asset Quality





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The following table summarizes delinquencies as a percentage of finance receivables:


January 31,October 31,20182017ChangeDelinquenciesRetail notes and finance leases greater than 60 days.0.2%—%0.2%Wholesale notes greater than 60 days—%—%—%Wholesale accounts greater than 60 days0.6%0.6%—%Allowance to finance receivables coverage ratio0.1%0.1%—%





At the current retail portfolio level, the ratio of retail notes and finance leases delinquencies greater than 60 days can fluctuate significantly as a result of the performance of any one customer. The fair value of vehicles repossessed for the three months ended January 31, 2018 and 2017, was $0.5 million and $0.1 million, respectively. Wholesale accounts delinquencies can relate to specific customer balances for which Navistar, Inc. has recorded reserves. These delinquencies do not typically reflect a default risk for NFC.


The allowance to finance receivables coverage ratio shown above remained constant as the primary component for wholesale finance receivables was unchanged.  The average impaired receivables as a percentage of average finance receivables were less than 0.1% for both of the three month periods ended January 31, 2018 and 2017, respectively.


The allocation of the Allowance for losses by portfolio segment is as follows (in millions):


January 31,October 31,20182017Retail portfolio$0.1$0.1Wholesale portfolio1.51.5Total$1.6$1.6





NFC evaluates its Allowance for losses based on a pool method for two portfolio segments: retail finance receivables and wholesale finance receivables.  The estimate of the retail portfolio allowance is based upon three factors:  a historical component based upon a weighted average of actual loss experience from the most recent 12 quarters, a specific reserve component, and a qualitative component if we determine that current economic and portfolio quality trends indicate that the historical component may not reflect the appropriate risk. For the wholesale portfolio, an allowance for losses is established using the average loss per occurrence, based on historical losses.


When we identify significant customers as a probable risk of default, we segregate those customers' receivables from the pool and separately establish a specific reserve based on the market value of the collateral and specific terms of the receivable contracts.  We use the same process in estimating the collateral values as we do in estimating the values of our vehicle inventory.


Financing Environment


Financing Volume and Finance Market Share


Wholesale notes purchased by NFC were $802.9 million and $719.9 million for the three months ended January 31, 2018 and January 31, 2017, respectively.  NFC provides wholesale financing for 100% of new truck inventory sold to Navistar, Inc.'s dealers and distributors through the customary free interest period offered by Navistar, Inc. As of January 31, 2018 and October 31, 2017, NFC retained floor plan financing for approximately 77% and 77%, respectively, of the dealers, after the free interest period.


Serviced wholesale notes balances, including the used truck financing, were $825.1 million and $897.2 million as of January 31, 2018 and October 31, 2017, respectively.


NFC's net retail notes and finance lease originations were $7.2 million and $0.4 million for the three months ended January 31, 2018 and January 31, 2017, respectively.


Operating lease originations were $35.4 million and $0.6 million for the three months ended January 31, 2018 and January 31, 2017, respectively.


Funds Management





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We have traditionally obtained the funds to provide financing to Navistar, Inc.'s dealers and retail customers from the financing of receivables in securitization transactions, bank credit facilities, and other secured funding facilities.  Given our debt ratings and the overall quality of our receivables, the financing of receivables in securitizations has been the most economical source of funding.


Credit Ratings


NFC's credit ratings were as follows:


As of January 31, 2018As of October 31, 2017FitchStandard& Poor'sFitchStandard& Poor'sB-B-B-B-Outlook StableOutlook StableOutlook StableOutlook Stable


Funding Trends


Benchmark interest rates have increased during fiscal 2017 and 2018. Increased equity or credit market volatility, or tightening of monetary policy by the US Federal Reserve, may increase borrowing rates on our variable rate debt. Credit spreads of our new and amended funding facilities have decreased following NIC's announcement of Volkswagen Truck & Bus GmbH's ("Volkswagen") investment in, and strategic alliance with, NIC, and NIC's improving financial performance as measured in the equity markets. This is evidenced by the improved credit spreads on the amendment and extension of the revolving portion of our bank credit facility in September 2017, our VFN facility renewal in December 2017, and the TRAC facility renewal in January 2018. Our borrowing costs can also be impacted by changes in credit rating agency assessments of our debt or the debt of NIC. Our ability to obtain financing at competitive rates depends substantially on the funding opportunities available.


Funding Facilities


NFC initially funds finance receivables using its bank credit facility.  In September 2017, the revolving portion of the bank credit facility was amended and extended to a maturity date of September 2021, with the facility maximum amount reduced from $274.7 million to $269.2 million effective in June 2018. Borrowings under the term loan portion of the bank credit facility were $73.6 million as of January 31, 2018, with  quarterly principal payments of $2.0 million, and a maturity of June 2018. NFC may increase the revolving or term loan commitments to a maximum facility of $700.0 million, subject to obtaining commitments from existing or new lenders.


The availability under the revolver portion of the bank credit facility was as follows (in millions):


January 31,October 31,20182017Revolver bank loan$274.7$274.7NFC revolving loan utilized(124.0)(127.0)Mexican sub-revolver loan utilized——Total availability$150.7$147.7





We finance certain receivables through securitizations utilizing the asset-backed public market and private placement sales.  NFC, through these securitizations, has been able to fund its operating needs at rates which are more economical than those available to NFC in the public unsecured bond market.  In a typical securitization transaction, NFC transfers a pool of finance receivables to a bankruptcy-remote, wholly-owned special purpose subsidiary.  The special purpose subsidiary then transfers the receivables to a legally isolated entity, generally a trust, in exchange for cash from the sale of asset-backed securities to investors.  The securities issued by the trust are secured by future collections on the receivables transferred to the trust.  These transactions are structured as sales from a legal standpoint but are treated as on-balance sheet secured borrowings according to current accounting guidance.  Navistar Financial Securities Corporation (“NFSC”) finances wholesale notes through a wholesale note owner trust.


We use other bankruptcy-remote, wholly-owned special purpose subsidiaries for secured borrowings on other types of assets whereby an interest in the assets is purchased directly by the lender without the use of a trust.  ITLC finances operating leases and certain finance leases, and TRAC finances retail accounts.


NFC securitizes wholesale notes through NFSC, which has in place a wholesale note trust that provides for the funding of eligible wholesale notes.  Components of available wholesale note trust funding facilities were as follows (in millions):





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Terminationor MaturityJanuary 31, 2018October 31, 2017Variable funding notesDecember 2018$350.0$425.0Investor notesSeptember 2018300.0300.0Investor notesJune 2019250.0250.0Total funding capacity900.0975.0Funding utilized(590.0)(685.0)Total availability$310.0$290.0





In December 2017, the maturity of the VFN was extended from May 2018 to December 2018, and the facility capacity was reduced from $425.0 million to $350.0 million.


In October 2016, NFSC completed the sale of $300.0 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250.0 million of investor notes that matured in October 2016.  In June 2017, NFSC completed the sale of $250.0 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250.0 million of investor notes that matured in June 2017.


ITLC provides for the funding of certain leases. ITLC received new lease funding proceeds of $16.2 million and $5.1 million during the three months ended January 31, 2018 and 2017, respectively.  As of January 31, 2018, the balance of ITLC's collateralized borrowings secured by operating and finance leases was $105.2 million compared to $94.4 million as of October 31, 2017.


The $100.0 million TRAC facility provides funding for certain retail accounts. As of January 31, 2018 and October 31, 2017, the amount borrowed under this facility was $44.6 million and $100.0 million, respectively. In January 2018, the TRAC funding facility maturity was extended from April 2018 to January 2019.








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