Apr 22, 2011

Fitch Affirms Caterpillar Financial’s ‘A’ Rating, Stable Outlook

Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and long-term debt ratings at ‘A’ for Caterpillar Inc. (CAT), Caterpillar Financial Services Corporation (CFSC). Fitch has also affirmed the companies’ short-term ratings at ‘F1′. The Rating Outlook is Stable. A full rating list is shown at the end of this release.

CFSC’s debt ratings are dependent on the support of CAT. The financial relationship between CFSC and CAT is governed and defined by a Support Agreement which requires CAT to maintain 100% ownership of CFSC, maintain CFSC’s net worth at not less than $20 million, and maintain CFSC’s fixed-charge coverage at not less than 1.15 times or higher on an annual basis.

The ratings incorporate CAT’s strong competitive position, solid operating performance, diversified customer base, global manufacturing footprint, an established and well capitalized dealer network, strong free cash flow, and strategic benefits from the pending acquisition of Bucyrus (BUCY). However, Fitch projects that CAT’s credit metrics will improve within 12-18 months of the acquisition’s closing as a result of secular growth in the company’s markets and incremental earnings from completion of the pending BUCY and MWM Holding GmbH (MWM) acquisitions.

Free cash flow (excluding CFSC) has improved, rising to nearly $3 billion from $618 million in 2009 and $186 million in 2008. CAT’s M&E debt declined by $2.1 billion during 2010, including about $800 million of intercompany debt owed to CFSC. CAT’s M&E debt-to-EBITDA ratio (leverage) at Dec. 31, 2010 improved to 1.0x compared to 3.6 times in 2009 and 1.5x in 2008. Fitch expects leverage to increase to around 1.4 times later in 2011 after the BUCY transaction closes, but leverage could decline during the subsequent 12-18 months as earnings and cash flow benefit from acquisitions, strong demand in CAT’s markets, and ongoing operating improvements.

CFSC’s operating performance has stabilized and begun to improve as credit costs have declined. Net income totaled $278 million for the year ended Dec. 31, 2010, a slight increase from 2009′s income of $259 million. Although retail originations showed a 24% increase in 2010 versus 2009, originations are still well below historical levels, as demand for CAT’s products remains below peak. Fitch expects near term profitability to hover around current levels as revenue growth remains challenging and credit losses remain above historical rates.

Still, asset quality performance is showing stable-to-improving trends over the past year, with delinquencies (30+ days) to total receivables declining to 3.87% at Dec. 31, 2010 from 5.54% at Dec. 31, 2009. Fitch expects the pace of asset quality improvement to moderate over the near term as the current economic environment remains challenging in certain sectors such as construction. CFSC’s capitalization, in conjunction with the financial profile of CAT, is consistent with similarly rated peers.

CFSC’s debt to equity ratio rose slightly to 6.30 times at Dec. 31, 2010 from 6.10x in 2009 following a $600 million dividend to CAT. Although leverage rose slightly, it is below historically managed levels of 7 times to 8 times. Fitch expects capitalization levels to stay below CFSC’s historical range in 2011 as asset growth will be minimal. CFSC utilizes a comprehensive funding strategy which, in combination with the financial strength of its parent, is consistent with its existing ratings. Continued access to the capital markets in recent years, not only in the U.S. but worldwide, demonstrates the strength of the CAT name and franchise.

Fitch has affirmed the ratings as follows:
Caterpillar Inc. (CAT)
–IDR at ‘A’;
–Senior unsecured notes at ‘A’;
–Short-term IDR at ‘F1′;
–Commercial paper (CP) at ‘F1′.
Caterpillar Financial Services Corporation (CFSC)
–IDR at ‘A’;
–Senior unsecured notes at ‘A’;
–Short-term IDR at ‘F1′;
–CP at ‘F1′.
Caterpillar Financial Services Australia
–Short-term IDR at ‘F1′;
–CP at ‘F1′.