DBRS Places Caterpillar’s Ratings Under Review – Negative

DBRS has today placed the A (high) and R-1 (middle) ratings of Caterpillar Inc. and Caterpillar Financial Services Limited (collectively, CAT or the Company) Under Review with Negative Implications. The change in rating status follows the downward revision in financial guidance provided by CAT for 2009, which includes materially lower sales and earnings. The revised guidance primarily reflects the severity of the ongoing global economic downturn, which has had a stronger impact on the Company than DBRS had previously expected. The resulting increase in CAT’s financial risk profile has added pressure to its ratings, and a rating action is expected to be taken within the next month.

CAT’s operations are highly cyclical and DBRS has historically factored this into the Company’s ratings. However, the extent of the equipment industry downturn, which has most notably affected its construction and mining-related customer end-markets, is much worse than DBRS’s expectations. While 2009 is likely to be a trough year for the Company’s operating results, macroeconomic visibility remains limited and a sharp recovery in 2010 is unlikely. Importantly, CAT’s debt levels rose through much of 2008, largely on account of share repurchases, and this exacerbated the impact of the sharp macroeconomic and financial industry correction on leverage and coverage ratios in Q4 2008. As such, CAT’s financial metrics are expected to remain below levels considered appropriate for A (high) and R-1 (middle) ratings for a longer-than-acceptable period of time. This stands in contrast to DBRS’s previous view that the Company’s credit profile would remain roughly in line with previous trough levels over the near term, with modest improvement anticipated in the latter part of 2009.

DBRS notes that despite the likelihood that negative rating action will be taken, a downgrade in excess of one notch is unlikely. CAT’s business profile remains strong, mainly due to its leading global market position, which is expected to remain intact during the current period of market weakness and beyond. In addition, CAT is expected to generate solid free cash flow that will be used toward debt reduction and which should partly mitigate the impact of lower earnings and cash flow (before working capital) on credit ratios. Furthermore, liquidity is strong and debt repayment requirements over the near term are not an issue.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is Rating the Industrial Products Industry, which can be found on our website under Methodologies.

This is a Corporate rating.