DBRS Downgrades Caterpillar’s Ratings to “A” and R-1 (low)

DBRS has today downgraded the ratings of Caterpillar Inc. and Caterpillar Financial Services Limited (collectively, CAT or the Company) to “A” from A (high) and to R-1 (low) from R-1 (middle); the trends are Stable. With this rating action, CAT has been removed from Under Review with Negative Implications, where it was placed on April 21, 2009. The rating action follows the revised near-term financial outlook provided by the Company during its Q1 2009 earnings release, which was significantly below DBRS’s expectations. CAT’s credit risk profile has increased to a level that is no longer viewed as acceptable for the previous ratings, mainly due to the greater-than-expected volatility of its manufacturing operations and high leverage. The trends on the ratings are Stable as CAT’s financial performance is expected to gradually improve through 2010 and debt reduction is expected over the near term.

CAT’s operations are highly cyclical and DBRS has historically factored this into the Company’s ratings. However, the Company has been significantly negatively affected by the current economic cycle and its manufacturing operations are viewed as having a higher degree of volatility than previously expected. The Company’s core credit metrics are likely to deteriorate materially in 2009: DBRS expects cash flow coverage to be below 20%, debt-to-EBITDA to be above 3.0 times and debt-to-capital in the 50% range (all adjusted for leases), which are aggressive for the former ratings. CAT’s debt levels had been increasing prior to the sudden drop in machinery demand in late 2008, partly as a result of share repurchases, which exacerbated the impact of lower operating results on coverage ratios.

As noted in the DBRS press release dated April 21, 2009, the severe and ongoing global economic downturn, which became most notable in late 2008, is largely responsible for the revised near-term earnings outlook. CAT’s Europe, Africa and Middle East (EAME) geographic segment experienced the sharpest decline in sales over the 12 months to March 31, 2009, closely followed by North America (which remains the largest source of consolidated sales). Softening demand for machinery in these regions, primarily in the construction and mining end markets, is expected to continue and is unlikely to recover materially until at least 2010. In addition, economic and credit market challenges have added pressure to Caterpillar Financial Services Limited’s operating results (although liquidity is not expected to be an issue and is currently strong).

There remains a high degree of uncertainty regarding the severity of the current downturn and the timing of a recovery. However, DBRS expects the Company’s earnings and cash flow to gradually improve through 2010 as demand moderately strengthens from 2009 trough levels, partly as a result of significant global fiscal stimulus spending. In addition, CAT is likely to generate solid free cash flow through the year, mainly from inventory drawdowns, which will be used largely to reduce debt and subsequently help limit the downside to coverage ratios. These factors primarily support the Stable trend.

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.