Fitch to Rate Caterpillar's $1.5B New Senior Unsecured Notes 'A+'

NEW YORK--(BUSINESS WIRE)--Fitch Ratings expects to assign an 'A+' rating to Caterpillar Inc.'s (CAT) planned issuance of $1.5 billion senior unsecured debt. The new debt is expected to be issued as a mixture of five-, 10- and 30-year term bonds. Proceeds will be used to reduce short term borrowings, increase liquidity, and support general working capital needs.

Fitch currently rates CAT and subsidiaries as follows:

Caterpillar Inc. (CAT)

--IDR 'A+';

--Short-term IDR 'F1';

--Senior unsecured notes 'A+';

--Commercial paper 'F1'.

Caterpillar Financial Services Corporation (CAT Financial)

--IDR 'A+';

--Short-term IDR 'F1';

--Senior unsecured notes 'A+';

--Commercial paper 'F1'.

Caterpillar Financial Services Australia

--Short-term IDR 'F1';

--Commercial paper 'F1'.

The ratings cover approximately $6.5 billion of on balance sheet debt at Caterpillar Inc. and approximately $27.7 billion of on balance sheet debt at Caterpillar Financial as of Sept. 30, 2008. The Rating Outlook is Stable.

The ratings reflect CAT's competitive products, diversified customer base, global manufacturing footprint and strong international dealer network that position the company to generate strong cash flow relative to the challenging market environment. The ratings are also supported by CAT's financial flexibility and liquidity position. Credit concerns include the possibility of contracting sales next year due to slowing end markets, increased leverage, weakening margins, production supply chain inefficiencies, and Fitch's expectation of increased pension contributions for the next several years. In addition, CAT Financial's declining operating performance and deteriorating asset quality bear watching. Minor concerns include increased cash flows related to share repurchase and the material amount of cash used for dividend payments. Fitch could review CAT's outlook should these credit concerns materially impact the company's long term financial and market position.

Markets outside the U.S. continue to support CAT's credit quality. In the first nine months of 2008, CAT's consolidated revenue increased approximately 17% due to significant overseas sales growth especially in the developing world. CAT generated approximately 60% of its revenue outside North America in the latest quarter. The company has more than doubled its revenue in five years and should end the year with revenue in excess of $50 billion. However, some international markets are showing some signs of slower growth, and Fitch estimates that there is a risk that CAT's overall revenue could decline next year with price realization not able to counter lower sales. Operating margins have contracted this year due to increased manufacturing costs with EBITDA margins on a latest twelve month (LTM) basis through Sept. 30, 2008 at 12.8% versus 13.5% at 2007 year end.

CAT's balance sheet debt increased $2.5 billion to $6.5 billion at Sept. 30, 2008 from year-end 2007. The increase in debt was primarily due to third quarter activities including the expected increase of CAT ownership in Shin CAT Mitsubishi (SCM), which increased consolidated debt $1.39 billion and the issuance of approximately $1 billion of commercial paper. A portion of the commercial paper issuance was done to build cash reserves. With the planned issuance of $1.5 billion of debt, Fitch believes it is possible that CAT will exceed its target debt-to-capital range of 35% to 45%. At Sept. 30, 2008, operating debt-to-capital was 40%. Exceeding the debt-to-capital range will be partially dependent on how much of the new debt CAT uses to pay down short-term debt at CAT and/or CAT Financial. Leverage will also be further impaired with the additional debt issuance. Third quarter LTM Total Debt-to-EBITDA stood at 1.1 times (x) versus 0.7x year end 2007.

CAT's cash deployment strategy includes share repurchases, increased capital expenditures to support growth and dividend payments. For the first nine months of the year, share repurchase activity increased to $1.49 billion, capital expenditures increased approximately 40% to $1.35 billion, and dividend payments increased 13% to $700 million versus the same period last year. Fitch's ratings for CAT incorporate expectations for substantial cash deployment actions including share repurchases, but Fitch also expects that share repurchase activity will be reduced or eliminated as end markets deteriorate. Fitch expects that weak asset performance this year will lead to higher pension contributions over the next several years. CAT's pension plan was 93% funded at year end 2007. CAT has indicated that in the fourth quarter it expects to contribute $110 million to its pension plan or $438 million for the full year. The company's cash flow from operations in the third quarter decreased 44% to $863 million from the same period last year, primarily due to higher inventory inefficiencies related to growth and increased contributions to its pension and OPEB plans.

CAT's liquidity (excluding CAT Financial) as of Sept. 30, 2008, totaled approximately $966 million and was made up almost entirely of cash and marketable securities, since the company's $1 billion committed revolver was supporting commercial paper issuance. CAT has other external credit facilities available which are a combination of committed and non committed facilities; these include committed SCM bank lines which are likely to be consolidated by the end of the year. There are no long term debt maturities for the remainder of 2008 and $317 million matures in 2009.

Caterpillar Financial Services Corporation (CFSC) debt ratings reflect its close operating and financial relationship with CAT. The financial relationship is governed by a support agreement which requires CAT to maintain 100% ownership of Financial, net worth in excess of $20 million and fixed-charge coverage of 1.15x or higher.

CFSC's year-to-date 2008 profitability remains flat compared to a year ago. Operating performance has recently shown evidence of weakening, primarily due to substantially higher borrowing costs and increased provisioning for credit losses. Portfolio growth, principally generated internationally, has helped to offset the increase in these costs.

Asset quality measures have weakened over the past year. Compared to last year, delinquencies grew to 3.64% from 2.52% and net charge-offs increased by $20 million to $61 million. Fitch expects asset quality will continue to weaken but does not expect the deterioration will exceed levels experienced during prior cyclical downturns. Fitch notes that CAT has prudently boosted loss reserves by approximately $50 million over the last year in response to weakening US economic conditions. Fitch expects near-term asset quality will continue to weaken but that overall performance will not exceed ranges experienced during prior cyclical downturns.

Capital resources and liquidity remain appropriate for the rating level and sufficient to meet ongoing finding requirements. Fitch notes that the company was able to issue commercial paper and medium terms notes, albeit at higher spreads and shortened maturities, through extremely difficult and volatile market conditions. In addition, Fitch expects origination volume to be down in 2009 versus 2008, therefore funding needs will be reduced.

Capitalization, both on an absolute and risk-adjusted basis, remains acceptable for the rating category. Leverage is expected to rise slightly from current levels but remain below 9.00x. Based on the underlying asset quality of the receivable portfolio and consistent performance of the company, Fitch remains comfortable with current leverage targets in relation to the current ratings.

In light of weakening overall economic conditions throughout the globe, Fitch anticipates CFSC's near-term operating performance will remain under pressure and may weaken should international portfolio growth slow and yields on earnings assets narrow due to higher loss provisioning and borrowing costs. Fitch recognizes the company's overall performance is cyclical and that the anticipated weakening in CFSC's overall financial performance is not expected to affect the current rating level.

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