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Global Credit Research - 15 Nov 2010
Approximately $18 billion of debt affected
New York, November 15, 2010 -- Moody's Investors Service affirmed the A2 long-term and Prime-1
short-term ratings of Caterpillar, Inc. (CAT) following
the company's announcement that it has reached an agreement to acquire
Bucyrus International, Inc. (Bucyrus) in a transaction valued
at $8.6 billion (including approximately $1 billion
of net debt assumed). CAT will fund the acquisition with a combination
of cash on hand, debt and up to $2 billion of equity.
The company's rating outlook remains stable.
Bucyrus' Ba2 corporate family rating and probability of default
ratings are under review for possible upgrade (see separate press release).
The affirmation of CAT's ratings reflects Moody's anticipation
that the Bucyrus acquisition will materially strengthen the company's
long-term position in the global mining equipment markets.
In addition, the continuing recovery in CAT's end markets
and the success of its operating efficiency initiatives should enable
it to remain well on track for generating credit metrics that are solidly
supportive of the A2 rating during 2011. This should be possible
despite what we believe is a high EBITDA multiple being paid for Bucyrus
and the sizable debt component that will fund the acquisition.
The continued improvement in CAT's credit metrics and its ability
maintain the A2 rating will also be supported by a prudent financial strategy.
We expect that this strategy will include a meaningful equity component
of the $8.6 billion purchase price, a restrained approach
toward share repurchases, a significant moderation in acquisition
activity during the intermediate term, and the maintenance of a
strong liquidity position.
The product portfolios and operating profiles of CAT and Bucyrus complement
each other well, and the acquisition should afford CAT with considerable
long-term opportunities to expand its revenue and earnings.
Bucyrus is one of the world's leading producers of heavy mining
equipment, an area that represents one the few gaps in CAT's
equipment portfolio. One of CAT's principal competitive strengths
is a global dealer network that is highly efficient, very profitable,
and well capitalized. In contrast, one of Bucyrus'
competitive challenges has been the lack of a strong dealer network.
The combination of Bucyrus' mining equipment operations and CAT's
dealer network should afford the opportunity to achieve considerable revenue
synergies by expanding sales of both mining equipment and related replacement
parts over the long-term. The strategic logic underpinning
this acquisition is primarily the longer-term revenue enhancement
opportunities rather than intermediate-term cost reduction initiatives.
Moody's notes that due to the longer-term nature of the anticipated
synergies with Bucyrus, the realization of these benefits is not
a driver of CAT's ability to restore A2 credit metrics by 2011.
We expect that improvement in CAT's existing business will be supported
by the strong rebound in global construction equipment markets,
particularly in Asia, and by the success of CAT's ongoing
productivity enhancement programs. CAT's recent operating
performance is showing strong evidence of these improving fundamentals
and is driving stronger credit metrics.
Following the unprecedented collapse of global construction equipment
markets during 2009 CAT's operating performance weakened considerably,
with EBIT/interest falling to 1.4x and debt/EBITDA rising to 4.7x.
Despite this weak performance Moody's affirmed CAT's A2 rating
and stabilized the rating outlook during June 2010 with the expectation
that during the coming year EBIT/interest would improve to approximately
4x, debt/EBITDA would fall to around 3x, and free cash flow
would exceed $2 billion for full-year 2010. We expected
further improvement during 2011 and anticipated that EBIT/interest would
exceed 6x and debt/EBITDA would fall below 2x. CAT is well on pace
to meet or exceed these 2010 and 2011 performance benchmarks despite the
increased debt burden of the Bucyrus acquisition and the longer-term
nature of the anticipated synergies.
We now expect CAT to generate EBIT/interest of more than 5x, debt/EBITDA
near 2x, and free cash flow well in excess of $2 billion
for 2010. Moreover, performance during 2011 should result
in EBIT/interest in excess of 6x, debt/EBITDA remaining near 2x,
and continued strong free cash flow.
CAT recognizes the need to maintain a healthy liquidity profile given
the cyclicality of its markets and the strategic importance of its large
captive finance operations. At September 2010, the company
had a strong liquidity position with cash and marketable securities of
$2.3 billion, committed credit facilities of $7.2
billion, and annual free cash flow exceeding $2 billion.
These liquidity sources totaling approximately $12 billion comfortably
exceeded twelve month liquidity requirements. The requirements
include the $750 million that we estimate is the minimum cash position
CAT needs to operate, and $8.3 billion in short-term
debt and current maturities of long-term debt (including financial
service obligations). Despite CAT's plan to fund a portion
of the Bucyrus purchase price with cash on hand, we expect that
the funding will be structured so that liquidity remains strong,
and liquidity sources remain comfortably in excess of liquidity requirements.
CAT's captive finance operations continue to play a critical role
in providing retail and wholesale funding for the company's machinery
and engine business globally. The financial profile of these operations
has continued to improve through September 2010 with the level of past
due accounts and charge offs continuing to decline, interest coverage
remaining healthy at over 1.3x, and capitalization remaining
strong with effective leverage approximating 6:1 based on Moody's
adjustments. We do not anticipate the Bucyrus transaction will
slow the pace of improvement in portfolio quality, or alter the
underwriting standards, capitalization strategy or funding requirements
of CAT's financial service operations.
The last rating action on CAT was a change in the outlook to Stable on
June 2, 2010.
The principal methodology used in rating CAT was the Heavy Manufacturing
Methodology, published in November 2009, which can be found
at www.moodys.com in the Rating Methodologies sub-directory
under the Research & Ratings tab. Other methodologies and factors
that may have been considered in the process of rating this issuer can
also be found in the Rating Methodologies sub-directory on Moody's
Caterpillar, Inc., headquartered in Peoria, Ill.,
is the world's leading manufacturer of construction and mining equipment,
diesel and natural gas engines and industrial gas turbines. The
company also is a leading services provider through Caterpillar Financial
Services, Caterpillar Remanufacturing Services, Caterpillar
Logistics Services and Progress Rail Services.
J. Bruce Clark
Senior Vice President
Corporate Finance Group
Moody's Investors Service
Michael J. Mulvaney
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service
Moody's Investors Service
Moody's affirms Caterpillar's rating following Bucyrus acquisition announcement.
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