Navistar Must Modify Diesel to Meet EPA Rules

Navistar International Corp. says it will supplement its failed diesel emission control strategy with an aftertreatment system already used by its competitors.

The maker of trucks and engines does not expect its 13-liter diesel to meet 2010 U.S. emission standards until the revamped engine arrives early next year. Navistar did not disclose how much it will cost to develop and produce the updated engine.

Analysts expect those expenses to erode profits. They also worry that the company will be forced to discount its existing technology in the interim. Since Navistar announced its engine plans on Friday, its shares have plunged 18% to close at $23.67 on Monday.

The company had hoped to meet federal emission standards with a relatively inexpensive exhaust gas recirculation system alone. But the technology, which it developed with and licensed from the Environmental Protection Agency, was not enough. To comply, Navistar says its biggest diesels will add a urea-based system that treats exhaust after it leaves the engine.

Until that revamped diesel debuts, Navistar says it aims to continue selling the existing engine by using emissions credits and paying fines. The company has paid penalties this year of as much as $1,900 per noncompliant engine sold.

Standard & Poor's Ratings Services and Fitch Ratings each downgraded the company's debt by one notch deeper into junk bond territory on Monday. S&P expresses skepticism about Navistar's near-term profit prospects and says the revamped engine may struggle for market acceptance. Fitch warns that the truck and engine maker could face liquidity constraints in coming months.