Fitch Affirms Caterpillar and Caterpillar Financial at 'A'; Outlook Stable

CHICAGO--()--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), and CFSC's subsidiaries including Caterpillar Financial Australia Limited. Fitch has affirmed the companies' short-term ratings at 'F1'. In addition, Fitch assigns ratings of 'A' to existing bank credit facilities for CAT and CFSC, including designated subsidiaries. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

The ratings for CAT, with CFSC on an equity basis, reflect the company's strong market positions in its global construction and mining machinery businesses, diverse customer base, operating discipline, and an established and well-capitalized independent dealer network. Leverage is within Fitch's expected range at a weak point in the demand cycle for CAT's machinery. Debt/EBITDA at Dec. 31, 2013 was approximately 1.2x on a preliminary basis, up slightly from 1.0x at the end of 2012. Strong free cash flow (FCF) in 2013 contributed to high cash balances at the end of the year, reflecting the impact of significant inventory reductions associated with declining sales.

Credit concerns are centered on CAT's financial policies and large payments to shareholders including share repurchases and dividends. Fitch believes CAT intends to maintain a strong balance sheet, but the recently announced $10 billion share repurchase program increases the risk that leverage and other credit metrics could weaken toward levels that Fitch would view as marginal for the current ratings. Actual metrics will depend on end-market conditions, the effectiveness of CAT's restructuring, and cash deployment.

Other concerns include weak demand for mining equipment that may not improve materially before 2015 at the soonest, the uncertain pace of an expected recovery in demand for construction equipment during 2014, and lower margins. Also, Fitch expects FCF in 2014 will be positive but substantially lower than 2013 due to the absence of large inventory reductions. Concerns about CAT's sizeable net pension obligation have been reduced due to favorable asset returns, higher discount rates and substantial contributions.

Sales and margins in 2013 in the Resource Industries and Construction Industries segments declined significantly in 2013. In 2014, modest improvement in the Construction Industries and Power Systems segments are expected to be offset by another sales decline in the mining equipment business. CAT reduced total inventory by nearly $3 billion in 2013 and approximately $2 billion in the fourth quarter of 2012, and CAT's dealers reduced inventory by more than $3 billion in 2013. Dealer inventory could decline again in 2014 but by a smaller amount.

The deterioration in margins reflects the impact of lower sales volumes, a smaller proportion of higher-margin mining equipment sales, pricing pressure, and restructuring charges. CAT incurred nearly $200 million of restructuring charges in 2013 and plans another $400 million-$500 million of actions in 2014. Restructuring is largely directed toward reducing near-term production costs for mining and construction equipment but does not involve permanent cuts to capacity which could be needed when the next up-cycle begins. Power Systems has also undertaken limited restructuring. Savings from restructuring could reach $200 million in 2014 and increase gradually to $400 million-$500 million annually as soon as 2016.

Free cash flow after dividends for the Machinery & Power Systems (M&PS) business, which excludes Financial Products, was a strong $4.9 billion in 2013 on a preliminary basis, compared to negative $1.1 billion in 2012. However, funds from operations, which excludes the impact of inventory and other working capital items, declined due to lower sales and the related negative impact of operating inefficiencies. In 2014, Fitch expects FCF could decline to $1.25 billion-$1.5 billion due to the absence of large inventory reductions, incremental restructuring costs, and higher dividend payments, partly offset by restructuring benefits, modestly lower pension contributions, and a small decline in capital expenditures. FCF would be higher when including dividends from CAT's Financial Products business, which Fitch classifies as investing cash flows. These dividends totaled $325 million in 2013.

Cash deployment for share repurchases has been significant, totaling $2 billion in 2013 and $1.7 billion in early 2014. CAT has a new $10 billion share repurchase program that expires in 2018. High cash balances and FCF support these repurchases, as well as an intercompany loan in excess of $900 million to the Financial Products group. However, an eventual recovery in construction and mining equipment could lead to a material increase in working capital requirements and limit CAT's ability to fund repurchases from FCF. If debt is required to fund such spending, credit metrics could weaken, at least temporarily, if operating results do not improve sufficiently.

CAT's liquidity (excluding CFSC) at Dec. 31, 2013, as calculated by Fitch, totaled $7.35 billion, including cash of $4.6 billion and credit facility availability of $2.75 billion, offset by $760 million of current maturities of long-term debt and $16 million of short-term debt. The $2.75 billion of credit facility availability is the internal allocation to M&PS of CAT's consolidated $10 billion facilities. CAT can revise the allocation of these facilities between CFSC and its manufacturing businesses at any time. The facilities consist of a $3 billion 364-day facility that expires in September 2014, a $2.6 billion facility that expires in September 2016, and a $4.4 billion facility that expires in September 2018. As of Sept. 30, 2013, CAT had $508 million of other committed and uncommitted lines, not including facilities available to CFSC. Long-term debt is well-distributed, with annual maturities not exceeding $900 million during the next six years.

Under intercompany agreements as of Sept. 30, 2013, CAT may borrow up to $1.29 billion from CFSC ($330 million outstanding) and CFSC may borrow up to $1.34 billion from CAT ($186 million outstanding) on a short-term basis. In addition, CFSC provides a $2 billion committed credit facility to CAT which expires in 2019. CFSC also purchases, at discount, dealer and customer receivables from CAT. Outstanding receivables balances purchased by CFSC totaled nearly $2.6 billion at Sept. 30, 2013 compared to $3.1 billion at the end of 2012. Fitch classifies changes in these amounts as financing cash flows at CAT's manufacturing business.

During 2013, contributions of approximately $800 million, together with positive asset returns and a higher discount rate, helped improve the funded status of CAT's pension plans to 86% at the end of 2013 on a preliminary basis from 70% at the end of 2012. Net pension obligations at the end of 2012 totaled $6.2 billion.

CATERPILLAR FINANCIAL SERVICES CORPORATION

At CFSC, operating performance has benefited from modestly higher average earning assets and lower loss provisioning in 2013. New retail originations decreased 6% in 2013 compared to last year, across all of CFSC's operating segments with the exception of North America. Fitch expects CFSC's operating performance in the near-term to be relatively consistent with 2013 results, given modest growth in new financing activity, offset by a softening of used equipment values.

Asset quality performance has been relatively stable, with delinquencies (30+ days) of 2.37% of receivables at Dec. 31, 2013, compared to 2.26% a year ago. Full-year net write-offs were 0.46% of the average annual retail portfolio in 2013, compared to 0.42% in 2012. As a result of portfolio growth over the last several years, Fitch expects receivable seasoning will yield some modest asset quality deterioration over time.

CFSC's balance sheet leverage, which is calculated by Fitch as debt-to-tangible equity, was around 8x at Dec. 31, 2013. According to Fitch, this is on the higher end of CFSC's historical range of 7.0x-8.0x, and consistent with similarly rated peers. Fitch does not anticipate any significant changes in CFSC's overall capital structure. Should funding requirements increase, Fitch believes CAT would inject additional capital into the finance arm, as necessary, to manage CFSC's overall leverage profile.

CFSC relies on the global debt capital markets and various bank funding programs to provide liquidity for its operations, as well as support from CAT. The company's ability to consistently access the global capital markets demonstrates the strength of CAT's brand and franchise. Fitch believes CFSC's comprehensive funding platform, in combination with the financial strength of its parent, is consistent with its existing ratings.

Fitch views CFSC as core to CAT's overall franchise and as such CFSC's ratings are linked to those 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 1.15x or higher on an annual basis.

CATERPILLAR INTERNATIONAL FINANCE LIMITED AND CATERPILLAR FINANCE CORPORATION

Fitch has assigned initial long-term IDRs of 'A' to Caterpillar International Finance Limited (CIF) and Caterpillar Finance Corporation (CFC), to reflect each entity's ability to borrow on one of three global credit facilities, aggregating $10 billion, provided by a syndicate of banks. The ratings reflect the unconditional and irrevocable guaranty provided by CFSC for full repayment of obligations under the facilities. CFSC and CAT are also co-borrowers on the facilities, although no debt is outstanding at present.

RATING SENSITIVITIES

Caterpillar Inc.

The ratings or Outlook could be negatively affected if:

--Financial results are substantially reduced for an extended period by weak demand in CAT's machinery end markets;

--CAT experiences poor execution of its operating strategies including restructuring and inventory and supply chain management;

--Market share declines materially in key product lines or geographic regions;

--Aggressive cash deployment contributes to higher leverage or materially lower cash and liquidity, including debt/EBITDA consistently above 1.5x. Fitch expects debt/EBITDA will typically remain below 1.25x, and funds from operations (FFO) adjusted leverage near a range of 2.0x or below, except during brief periods of cyclical weakness.

Underlying cyclicality in CAT's machinery markets limit the potential for a positive rating action. However, developments that Fitch would view as positive for CAT's credit profile include:

--An increase in the company's geographic and product diversification and in the proportion of relatively stable services revenue;

--Share growth in emerging markets;

--Lower peak financial leverage during downcycles and stronger FCF through the business cycle;

--Effective product development.

CFSC and Designated Subsidiaries

Positive rating momentum will be limited by Fitch's view of CAT's credit profile, as CFSC's ratings and Outlook are linked to that of its parent. Fitch cannot envision a scenario where the captive would be rated higher than its parent.

Negative rating actions for CFSC could be driven by:

--A change in the perceived relationship between CAT and CFSC; for example, if Fitch believed that CFSC has become less core to CAT's strategic operations and/or adequate financial support was not provided to the finance arm in a time of crisis; or

--Consistent operating losses;

--A material change in balance sheet leverage, and/or;

--Deterioration in the company's liquidity profile, which alters CFSC's perceived risk profile and/or requires the injection of regular financial support from CAT.

The ratings cover approximately $8.8 billion of debt at CAT as of Dec. 31, 2013 on a preliminary basis, and more than $29 billion of unsecured debt at CFSC, before considering intercompany loans.

Fitch has affirmed the following ratings:

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 Australia Limited

--Short-term IDR at 'F1';

--CP at 'F1'.

Fitch has assigned initial ratings to $10 billion of existing bank credit facilities as follows:

Caterpillar Inc.

--Senior unsecured bank credit facilities 'A'.

Caterpillar Financial Services Corporation

--Senior unsecured bank credit facilities 'A'.

Fitch has also assigned initial IDRs and ratings to $10 billion of existing bank credit facilities as follows:

Caterpillar International Finance Limited )

--IDR 'A';

--Senior unsecured bank credit facilities 'A'.

Caterpillar Finance Corporation (CFC)

--IDR 'A';

--Senior unsecured bank credit facilities a 'A'.

Additional information is available at www.fitchratings.com'.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology' (Aug. 5, 2013);

--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);

--'Global Financial Institutions Criteria' (Dec. 11, 2012);

--'Global Financial Institutions Rating Criteria' (Aug. 15, 2012).

Applicable Criteria and Related Research:

Global Financial Institutions Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=732397

Global Financial Institutions Rating Criteria Exposure Draft

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714136

Parent and Subsidiary Rating Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552

Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139

Additional Disclosure

Solicitation Status

http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=820043

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Contacts

Fitch Ratings, Inc.
Primary Analyst (Caterpillar Inc.)
Eric Ause, +1-312-606-2302
Senior Director
Fitch Ratings, Inc.
70 Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Bill Densmore, +1-312-368-3125
Senior Director
or
Primary Analyst (Caterpillar Financial Services Corporation and subsidiaries)
Johann Juan, +1-312-3339
Director
or
Secondary Analyst
Brendan Sheehy, +1-212-908-0138
Director
or
Committee Chairperson
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com

Sharing

Contacts

Fitch Ratings, Inc.
Primary Analyst (Caterpillar Inc.)
Eric Ause, +1-312-606-2302
Senior Director
Fitch Ratings, Inc.
70 Madison Street
Chicago, IL 60602
or
Secondary Analyst
Craig Fraser, +1-212-908-0310
Managing Director
or
Committee Chairperson
Bill Densmore, +1-312-368-3125
Senior Director
or
Primary Analyst (Caterpillar Financial Services Corporation and subsidiaries)
Johann Juan, +1-312-3339
Director
or
Secondary Analyst
Brendan Sheehy, +1-212-908-0138
Director
or
Committee Chairperson
Meghan Neenan, CFA, +1-212-908-9121
Senior Director
or
Media Relations
Brian Bertsch, +1-212-908-0549
brian.bertsch@fitchratings.com