Fitch Expects to Rate Caterpillar's Planned Sr Unsec Notes 'A'; Outlook Stable

CHICAGO--()--Fitch Ratings expects to assign a rating of 'A' to Caterpillar Inc.'s (CAT) planned issuance of approximately $2 billion of senior unsecured notes. The new notes will consist of a mix of long-term maturities. Proceeds will be available for general corporate purposes and to repay $750 million of notes maturing in May 2014. The Rating Outlook is Stable. A full list of ratings follows at the end of this release.

KEY RATING DRIVERS

Fitch estimates the incremental new debt, adjusted for the repayment of maturing debt in May 2014, will increase debt/EBITDA slightly from 1.2x at March 31, 2014 but would remain within Fitch's expected range at a weak point in the demand cycle for CAT's machinery business. Fitch's credit metrics for CAT consider Caterpillar Financial Services Corporation (CFSC) on an equity basis. Proceeds from the new debt will boost CAT's already solid cash balances at the machinery business.

The ratings for CAT 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. Fitch expects free cash flow (FCF) in 2014 will be solid, but lower than 2013 which benefited from large inventory reductions. Fitch believes the bulk of inventory adjustments related to lower demand have largely been completed at CAT and its dealers.

In 2014, Fitch estimates FCF after dividends will be $1.25 billion-$1.5 billion. FCF reflects the negative impact of 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. Dividends to CAT totaled $325 million in 2013.

Credit concerns are centered on weak demand for mining equipment that may not improve until 2015 at the soonest, risks surrounding the nascent recovery in demand for construction equipment during 2014, and lower margins. The outlook for mining equipment has weakened in early 2014 due to low commodity prices and cautious spending by mining companies. This trend is offset by optimism about construction activity that has contributed to an increase in inventories held by CAT's dealers. Actual demand by end users could be tempered by lower-than-expected construction starts and the potential impact of political concerns surrounding Russia.

Other concerns include payouts to shareholders. Cash deployment for share repurchases has been significant, totaling $2 billion in 2013 and $1.7 billion in the first quarter of 2014. CAT has a $10 billion share repurchase program that expires in 2018. Fitch believes CAT intends to maintain a strong balance sheet, and 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.

Operating margins have been lower since sales volumes began to fall near the end of 2012. Margins could benefit in 2014 from a small increase in sales in the low single digit range as higher sales of construction equipment more than offsets another decline in mining equipment. However, the positive impact on margins from higher volumes could be offset by the lower mix of higher-margin mining equipment, pricing pressure, and restructuring charges.

Restructuring charges totalled nearly $200 million in 2013, and CAT 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.

Under intercompany agreements as of March 31, 2014, CAT may borrow up to $1.29 billion from CFSC ($337 million outstanding) and CFSC may borrow up to $2.34 billion from CAT ($1.12 billion 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 $3.5 billion at March 31, 2014 compared to $3.1 billion at the end of 2013. Fitch classifies changes in these amounts as financing cash flows at CAT's manufacturing business.

CAT's liquidity (excluding CFSC) at March 31, 2014, as calculated by Fitch, totaled $6 billion, including cash of $4.1 billion and credit facility availability of $2.75 billion, offset by $777 million of debt due within one year. A majority of CAT's cash is held outside the U.S. but could be repatriated without a significant tax impact.

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 March 31, 2014, CAT had $234 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 five years.

CAT expects to contribute $510 million to its pension plans in 2014 compared to $844 million in 2013. The funded status of CAT's pension plans improved to 86% at the end of 2013 from 70% at the end of 2012. Net pension obligations at the end of 2013 totaled $2.7 billion.

CATERPILLAR FINANCIAL SERVICES CORPORATION

Fitch expects CFSC's operating performance in the near-term to be consistent with recent results, given modest growth in new financing activity, offset by a softening of used equipment values. Operating performance benefited from modestly higher average earning assets in 2013 and the first quarter of 2014. Loss provisions increased in the first quarter of 2014 after declining for all of 2013. New retail originations decreased 4% in the first quarter of 2014 due primarily to lower volumes in Mining and Asia/Pacific, offset by an increase in North America. Originations declined 6% in 2013 across all of CFSC's operating segments except North America.

Asset quality performance has been relatively stable, with delinquencies (30+ days) of 2.44% of receivables at March 31, 2014, compared to 2.52% one year earlier. Net write-offs in the first quarter were $38 million compared to $10 million in the year-earlier quarter. In 2013, 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, is expected to be within CFSC's historical range of 7.0x-8.0x as of Dec. 31, 2013, 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.

The ratings for Caterpillar International Finance Limited (CIF) and Caterpillar Finance Corporation (CFC) reflect the unconditional and irrevocable guaranty provided by CFSC for full repayment of obligations under three global credit facilities, aggregating $10 billion, provided by a syndicate of banks. CFSC and CAT are also co-borrowers on the facilities.

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 on 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 March 31, 2014 and more than $29 billion of unsecured debt at CFSC, before considering intercompany loans.

RATINGS

The ratings for CAT and its affiliates are described below:

Caterpillar Inc. (CAT)

--IDR 'A';

--Senior unsecured notes 'A';

--Senior unsecured bank credit facilities 'A'.

--Short-term IDR 'F1';

--Commercial paper (CP) 'F1'.

Caterpillar Financial Services Corporation (CFSC)

--IDR 'A';

--Senior unsecured notes 'A';

--Senior unsecured bank credit facilities 'A'.

--Short-term IDR 'F1';

--CP 'F1'.

Caterpillar Financial Australia Limited

--Short-term IDR 'F1';

--CP 'F1'.

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);

--'Finance and Leasing Companies Criteria' (Dec. 11, 2012);

--'Global Financial Institutions Rating Criteria' (Jan. 31, 2014).

Applicable Criteria and Related Research:

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

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

Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=714476

Finance and Leasing Companies Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696720

Global Financial Institutions Rating Criteria

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

Additional Disclosure

Solicitation Status

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Contacts

Fitch Ratings
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, +1 312-368-3339
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
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, +1 312-368-3339
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