Fitch Downgrades Caterpillar and CFSC to 'A'; Affs S-T at 'F1'; Outlook Stable

Caterpillar Inc. (CAT)

-- IDR downgraded to 'A' from 'A+';

-- Short-term IDR affirmed at 'F1'

-- Senior unsecured notes downgraded to 'A' from 'A+';

-- Commercial paper (CP) affirmed at 'F1'.

Caterpillar Financial Services Corporation (CFSC)

-- IDR downgraded to 'A' from 'A+';

-- Short-term IDR affirmed at 'F1';

-- Senior unsecured notes downgraded to 'A' from 'A+';

-- CP affirmed at 'F1'.

Caterpillar Financial Services Australia

-- Short-term IDR affirmed at 'F1';

-- CP affirmed at 'F1'.

The Rating Outlook is Stable.

The ratings cover approximately $6.9 billion of unsecured debt at CAT and approximately $22.6 billion of unsecured debt at CFSC as of March 31, 2009.

The rating actions for both entities reflect the weak global economy, which will pressure CAT's business throughout 2009 and possibly into 2010; the magnitude of CAT's expected sales decline in 2009 which is now estimated by the company to be down 32%; CAT's pension deficit; and projected credit metrics that Fitch views as more appropriate for the 'A' category for CAT in the trough period of this cycle. The rating actions take into account the rapid deterioration in CAT's end-markets, and the difficulty that it presents to the company in reducing costs as quickly as revenues fall.

The Stable Outlook for both entities reflects Fitch's expectation that CAT will be able to remain profitable, generate free cash flow, and maintain solid liquidity in 2009 despite the rapid and substantial downturn in its business. These expectations assume that CAT successfully executes enterprise actions to reduce costs and build liquidity in the trough of this down cycle. Fitch also believes that CAT has additional actions that it can take to further build liquidity. Fitch expects 2009 will be the trough in this cycle, and credit metrics could improve in 2010 even if volumes are flat versus 2009 given CAT's cost-cutting actions and inventory reduction initiatives.

The ratings reflect CAT's competitive products, diversified customer base, global manufacturing footprint and strong international dealer network that position CAT well for an eventual rebound in the global market. Credit concerns include the length and depth of the global recession, execution risks in CAT's plan to address the weaker environment, increased leverage, higher cash outlays related to pension plans, and production supply chain inefficiencies. Additional concerns at CFSC include declining operating performance and deteriorating asset quality.

Enterprise actions CAT is taking in this downturn include reducing headcount, cutting spending, and boosting liquidity through working capital improvements and setting up an additional credit facility, described below, as well as continuing the suspension of share repurchase activity. CAT continues to give its dealers leeway to cancel orders so that the company's distribution channel remains strong. Fitch believes the likelihood of CAT's downside scenario, in which Machinery and Equipment revenue would be down approximately $19.2 billion or 40% from 2008 will mainly depend on the global economy and commodity prices. CAT expects restructuring costs to total $700 million in 2009.

The funding status of CAT's pension plans declined from 93% funded at the end of 2007 to 61% funded at the end of 2008, requiring a $3.4 billion adjustment to equity that caused the company to be below its credit facility equity covenant at the end of 2008, for which it received bank consent. CAT now expects to contribute approximately $1 billion to its pension plans in 2009 compared to $422 million in 2008. Other uses of CAT's cash in 2009 include $1.5 billion in capital expenditures, a 38% reduction from 2008, and approximately $1 billion of dividend payments.

CAT's balance sheet debt decreased $489 million to $6.9 billion at March 31, 2009 from year-end 2008. Fitch calculates CAT's total debt-to-EBITDA on a latest 12-month basis (LTM) at March 31, 2009 at 1.8 times (x) versus 1.5x at year-end 2008. Fitch expects CAT's leverage to continue to increase throughout the year due to lower profits, but the company should be able to partly offset this by reducing debt, which will be the company's primary use of free cash flow in 2009. Fitch expects free cash flow to increase significantly compared to the low levels in 2008 as a result of substantial working capital reductions and lower capital expenditures. In CAT's first quarter ended Mar. 31, 2009, machinery and engine revenue decreased approximately 22.5% to $8.5 billion due to significant volume declines and negative currency impacts somewhat offset by improved price realization. Fitch's calculated EBITDA margins for CAT's first quarter declined to 8.8% versus 13.4% in the same period last year due to declining sales volumes, increased manufacturing costs related to lower volumes, and restructuring costs of approximately $546 million.

CAT's cash position (excluding CAT Financial) as of March 31, 2009 was $2.1 billion. The company's $1 billion committed revolver is supporting commercial paper issuance. CAT has other liquidity sources including an additional facility described below, and external credit facilities available which are a combination of both committed and non-committed facilities; these include committed CAT Japan Ltd. bank lines which were consolidated at the end of last year. Debt maturities in 2009 total $456 million and there are no other significant debt maturities until 2011 when $626 million is due.

CAT put an additional $1.375 billion 364-day facility in place at the end of March as insurance against adverse market conditions. This facility is considerably more expensive than the company's existing credit facilities and, compared to its $2.25 billion 364-day facility that was increased last September, costs 1.9% versus 0.06% without borrowings, since it includes a 1.75% upfront fee and an increased facility fee that is currently nine basis points higher on an annualized basis. Should the March facility be drawn, it includes fees in addition to LIBOR that are not included with the September facility, including a 0.75% borrowing fee and duration fees between 0.5% and 2.25%. Fitch believes that the pricing of this facility is not indicative of what CAT expects to pay on its conventional credit facilities, but is more an illustration of the tight bank credit market, which leads to higher credit costs for companies such as CAT that want additional liquidity cushion.

CFSC's first-quarter 2009 operating performance was down versus 2008, but this deterioration was expected because of the current economic environment. Near-term profitability will continue to be driven by the demand for CAT products and corresponding expected loan originations and increased provisioning due to expected asset quality deterioration. Fitch expects CFSC profitability metrics to decline in 2009 versus 2008, as originations will be lower, provision expense will remain elevated, and net interest margins will continue to be tight. Given the global economic weakness, Fitch expects CFCS's delinquency and charge-off rates to rise from current levels, although at present the company appears adequately reserved with reserves at 1.5% of average receivables. Fitch also considers CFSC's funding and leverage to be appropriate for the current rating category. Fitch believes that CFSC has already satisfied most of its funding needs for 2009 through issuance of term debt and medium-term notes in the first quarter.

CFSC's debt ratings are aligned with CAT as a result of its close operating and financial relationship. The financial relationship is governed by a support agreement which requires CAT to maintain 100% ownership of CFSC, net worth in excess of $20 million and fixed-charge coverage of 1.15x or higher on an annual basis.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.

SOURCE: Fitch Ratings

Fitch Ratings 
Nathan Spunt, +1-212-908-0202 
Craig Fraser, +1-212-908-0310 (New York) 
(Caterpillar Inc.) 
Peter J. Shimkus, +1-312-368-2063 (Chicago) 
(Caterpillar Financial) 
William Artz, +1-312-368-2083 (Chicago) 
(Caterpillar Financial) 
Cindy Stoller, +1-212-908-0526 (Media Relations, New York) 
cindy.stoller@fitchratings.com